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Monday, January 5, 2009

Gold Outperformed the S&P 500, 1997-2008

Suppose there were a hedge fund or mutual fund with the following performance record.

  • In 2008, this fund gained 3.28% while the S&P 500 lost 37.5%. In 2008, nearly every mutual fund and hedge fund lost money. Any fund that profited in 2008 must have been very well managed.
  • Over the last 5 years, this fund outperformed the S&P 500 by 125%, an annualized difference of 17%! This fund gained 113% while the S&P 500 lost 12%.
  • Over the last 8 years, this fund outperformed the S&P 500 by 245%, an annualized difference of 16.7%! This fund gained 223% while the S&P 500 lost 22%.
  • Over the last 10 years, this fund outperformed the S&P 500 by 215%, an annualized difference of 12.2%! This fund gained 201% while the S&P 500 lost 14%.
  • Since 2001, the price of this fund has never decreased in a single year. If you bought on January 1 and held a full year, you would have not lost money.
  • This fund has outperformed the S&P 500 for 7 out of the last 9 years.
  • Over the past 10 years, this fund had an actual historic volatility of 9.5% while the S&P 500 had an actual historic volatility of 21%.
  • Jealous of this fund's performance, other fund managers are naked short selling this fund's shares in a desperate attempt to drive down the price and discredit the fund manager.
  • This fund has been in operation for more than 100 years. (Actually, it's been operating for thousands of years. This fund was so successful that the State banned people from investing in this fund from 1933-1975.)
  • Shares of this fund may be traded without reporting your transaction to the State and being required to pay capital gains taxes.
If such a mutual fund or hedge fund actually existed, its fund manager would be on the Communism Channel (CNBC) every day, bragging about the size of his enormous genitals.

How eager are you be to invest in this fund? What is this super fund that has trounced the S&P 500 with much lower volatility?

This super magical fund is, of course, gold.

Last year was a very good year for gold relative to the S&P 500. The S&P 500 took a huge loss of 37%, while gold gained a modest 3%. In 2008, there was massive money supply inflation to bail out banks, a trend which should continue for 2009. This indicates that gold is well positioned for another great year in 2009.

When the State inflates the money supply, no new wealth is generated. Via inflation, the State steals from the productive sector of society and gives the profits to the parasite sector. If you invest in gold, then the State may not steal from you via money supply inflation.

The State is currently inflating to bail out the bankers and insiders. This money supply inflation should also lead to higher gold prices. Over a 5-10+ year period, the rate of increase in the price of gold should be very nearly perfectly correlated with money supply inflation. For this reason, I consider gold to be the most reliable measure of inflation over an extended time period.

When the FRN-denominated price of gold increases, a more accurate statement is "The value of the dollar has decreased."

Here is my raw data. For the S&P 500, I use VFINX with reinvested dividends (via Yahoo Finance). I use the "Adj. Close" column from Yahoo Finance. It is important to include reinvested dividends, because over a long period of time dividends contribute substantially to the total return.

For historic gold prices, I use and

Here is the raw data:

YearS&P 500GoldVFINX 1 Year GainGold 1 Year GainDiff
2009$83.09$874.50 -37.57%3.28%40.85%
2008$133.09$846.75 5.39%32.36%26.96%
2007$126.28$639.75 15.64%20.71%5.07%
2006$109.20$530.00 4.77%19.17%14.40%
2005$104.23$444.74 10.74%8.55%-2.19%
2004$94.12$409.72 28.49%12.75%-15.74%
2003$73.25$363.38 -22.17%17.32%39.49%
2002$94.11$309.73 -12.03%14.27%26.30%
2001$106.98$271.04 -9.05%-2.89%6.16%
2000$117.63$279.11 21.08%-3.84%-24.92%
1999$97.15$290.25 28.61%0.54%-28.07%
1998$75.54$288.70 33.18%0.57%-32.61%
1997$56.72$287.05 22.88%-22.21%-45.09%
1996$46.16$369.00 37.42%-4.65%-42.07%
1995$33.59$387.00 1.17%0.98%-0.20%
1994$33.20$383.25 9.14%-2.17%-11.31%
1993$30.42$391.75 8.22%17.64%9.42%
1992$28.11$333.00 30.20%-5.71%-35.90%

Notice that gold has trounced the S&P 500 recently.

In the late 1990s, the S&P 500 outperformed gold substantially. Still, you have to go all the way back to January 1, 1996 to find a time where a buy-and-hold S&P 500 investment would have outperformed a buy-and-hold gold investment, assuming you bought-and-held to the present.

I calculated "Gold has outperformed the S&P 500 by 17% annualized over the past 5 years, 16.7% annualized over the past 8 years, and 12.2% annualized over the past 10 years." I couldn't believe it! I checked and rechecked the calculation, and found no error.

YearS&P 500GoldDiffCum DifAnn Cum DiffS&P 500 Cum GainGold Cum Gain
2009$83.09$874.50 40.85%40.85%40.85%-37.57%3.28%
2008$133.09$846.75 26.96%70.90%30.73%-34.20%36.69%
2007$126.28$639.75 5.07%88.91%23.62%-23.91%65.00%
2006$109.20$530.00 14.40%116.91%21.36%-20.28%96.63%
2005$104.23$444.74 -2.19%125.16%17.62%-11.72%113.44%
2004$94.12$409.72 -15.74%127.22%14.66%13.43%140.66%
2003$73.25$363.38 39.49%194.05%16.66%-11.71%182.34%
2002$94.11$309.73 26.30%244.98%16.74%-22.33%222.65%
2001$106.98$271.04 6.16%242.68%14.67%-29.36%213.32%
2000$117.63$279.11 -24.92%215.76%12.19%-14.47%201.29%
1999$97.15$290.25 -28.07%192.91%10.26%9.99%202.91%
1998$75.54$288.70 -32.61%158.16%8.22%46.49%204.65%
1997$56.72$287.05 -45.09%56.99%3.53%80.00%136.99%
1996$46.16$369.00 -42.07%-21.40%-1.70%147.37%125.97%
1995$33.59$387.00 -0.20%-22.09%-1.65%150.27%128.18%
1994$33.20$383.25 -11.31%-49.91%-4.23%173.14%123.23%
1993$30.42$391.75 9.42%-32.98%-2.33%195.59%162.61%

Here's a chart you'll never see on the Communism Channel. (This is my first attempt exporting a chart from Excel to Blogger.) I normalized this chart so that January 1, 1998 equals 100. On the X axis, "01" means "January 1, 2001". Technically, the Y axis should be a log-scale, but it wasn't obvious how to get Excel to do that.

The above chart illustrates how gold has trounced the S&P 500 in recent years.

I also performed a volatility calculation for the S&P 500 and gold, using annual price points. I calculated a historic volatility of 9.5% for gold and 21% for the S&P 500. To calculate volatility, you merely calculate the standard deviation of {ln(P_i+1/P_i)}. I'm using annual price points, so there's no need to multiply by sqrt(252) like when you use daily price points. I'll give the calculation details if someone asks.

I was surprised that the volatility of gold was that much less than that of the S&P 500. This could be a symptom of gold price manipulation. Alternatively, gold really is that much sounder an investment than the S&P 500. Gold's FRN-denominated price should track true inflation, but many other factors affect the price of the S&P 500. Further, during recessions, some people sell stocks and buy gold as an inflation hedge.

Some pro-State trolls will say:

Doing a comparison for the last 10 years is invalid. If you go all the way back to the peak of gold's price in the 1980s, then the S&P 500 trounced gold.

If the last few years are invalid, then I guess I should call my broker and ask him to refund my recent losses in the stock market.

For any asset, if you buy at a maximum, you will experience subpar returns. If you bought the S&P 500 at its maximum last year or at the maximum in 2000, you would be showing a steep loss.

If you bought an ounce of gold every year since gold ownership was re-legalized in 1975, you probably would have trounced the return of an equivalent investment the S&P 500. I haven't performed this calculation, but I'll do it if someone asks.

There is a valid reason to believe that gold will continue to outperform the S&P 500. When gold ownership was re-legalized in 1975, most of the world's gold supply was owned by central banks. In the '80s and '90s, the central banks were selling/leasing their gold reserves to drive down the price of gold and discredit gold as an investment. They have nearly used up their gold reserves, limiting their ability to manipulate the price of gold downwards. In the present, there is massive inflation to bail out the bankers and insiders. State bureaucrats are inflating to push up the stock market. This inflation will also show up as higher gold prices.

State bureaucrats create no new wealth when they inflate the money supply. By inflating, the State merely steals from productive workers, destroying wealth in the process.

There was another symptom of gold market manipulation last year. The "official" price of gold had crashed substantially from the highs in summer 2008. However, many dealers had no inventory. They knew that the price of gold had to come back up, due to inflation, and they made the rational decision to hold onto their gold reserves. Unable to buy physical gold at the "official" price, they stopped selling their inventory.

Some people might have successfully arbitraged this discrepancy. They bought a gold futures contract and took physical delivery. After the December futures contract expired, gold returned to more reasonable prices.

Pro-State trolls on the Communism Channel say:

Gold is a dead-weight asset. You have to pay storage costs, and gold does not earn you a dividend like a stock. Only idiots invest in physical gold.

Only idiots believe the lies they hear while listening to comedians on the Communism Channel. CNBC is a branch of the State, and is required to repeat the "Gold investors are idiots!" evil fnord as often as possible.

If stocks are so superior to gold, then why has gold trounced the S&P 500 over the past 10 years? It isn't valid to make a comparison going back more than 10-15 years, because gold ownership was illegal until 1975 and central banks have been selling/leasing their gold reserves to drive down the price.

There is another reason to believe that gold will continue to outperform the S&P 500. When you buy shares of stock in a corporation, you don't get full allodial title. You can't prevent executives from diluting your ownership, granting themselves stock/options. You can't prevent executives from squandering the corporation's resources, by giving lucrative consulting contracts to their friends and relatives. As a small individual investor, you have no say in how the corporation is managed. I never realized that corporate executives were stealing from shareholders at a rate of 10% per year, which is the difference between a gold investment and a S&P 500 investment!

Whiners on gold investment websites say:

WAAAH!!! The State is manipulating the price of gold downward!!

If you believe this to be true, then buy all the gold you can and take physical delivery. Appreciate the discount that the State is giving you on your gold purchase.

In the short term, the State may manipulate the market. In the long-run, the laws of supply and demand cannot be denied.

Physical gold and silver may be the only investment that survives the collapse of the State, provided you can prevent your physical metal from being stolen from you. There are two risks of investing in physical metal. It may be stolen by common criminals, or it may be stolen by criminals wearing badges and uniforms! I still like those odds better than State-licensed paper investments, where I'm guaranteed to get ripped off by inflation. As a hedge, you can keep some of your savings in worthless State paper and some of your savings in physical gold or silver.

I performed this calculation a year ago, but the discrepancy was not as great. I predict that gold will continue to outperform State-sanctioned paper investments. I was shocked to find that gold had outperformed the S&P 500 by such a wide margin.


fritz said...

copper,silver, and gold will be very valuable after the collapse. An interesting fact,all pennies made on or before 1982 are totally made of copper(except the zinc 1943 pennies). which are valued at 2 cents or more for the copper value in each penny. Right now the deluded copper penny costs .011 dollars to create. making it cost more than its present value.

All dimes and quarters created up to 1964 are totally silver. You wont find very many in circulation these days.

I think it would cost to much to melt pennies and sell the copper and show a profit. Copper has a high melting point.

But just look through a bunch of pennies. There is still a whole crap load of true copper pennies left in circulation.I think its against the law to destroy government coins. I wonder how those novelty penny crushing machines.the ones that charge you 50 cents to crush a penny into an elongated token, that says the Boston science museum get away with it.

I think there could be a market in selling the copper in old pennies.
you would just have to work it right. you could get almost 100% return on your investment.


Invest It Wisely said...

I did the comparison for the Wilshire 5000, and gold would have to hit around $2350 in price to beat Wilshire 5000 total returns since 1975.

If you look at the total market returns since say, 1920 or so, then gold simply cannot compete. However, it's quite interesting to see how it's been doing lately. Could gold be the ultimate index fund in the long run?

FSK said...

Private ownership of gold was illegal from 1933-1975. A comparison including that time period is invalid.

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