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VIDEOWhy Gold Is Wall Street's Best Kept Secret
If you've missed gold's run so far, you're not alone, but there's still plenty of reasons to buy now.
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The rhetoric that's been drilled into your head from business school, Wall Street, and financial consultants has been largely uniform: The performance of gold versus stocks is pathetic for the metal whose lore pre-dates the fall of Adam and Eve. (That’s Genesis Chapter Two in case you'd like to check that reference).
Gold for the Long Run focused on how much better gold has fared versus perceptions since the 1800s, particularly versus dollar cash. It attempted to make the case that diversification away from 100% dollar exposure of your cash with some physical gold cash is simply the most remedial risk-management strategy and should be de rigueur instead of obsolete in American financial planning. The divergent track records of the two assets, their inverse correlation, and their contrasting fundamentals strongly support physical gold exposure.
At least weekly since that article was published, however, investment professionals have argued to me that in modern times gold’s performance has been pitiful and they quickly pull out charts to support their case. Before agreeing with such a conclusion, however, consider that gold’s price was fixed for much of American history, making the comparison to equities and bonds biased.
As of last month however we now have more than 39 years of data to compare the returns of equities versus gold. The starting date is August 15, 1971, which was the day when Nixon reversed the last vestiges of our Constitutional mandate for gold and silver. On August 15, 1971, the value proposition that led your grandparents to save their money in dollar currency at the bank was obliterated. Tragically for the middle class in America, the paramount import of this transformation was never broadly communicated in the media or from financial consultants who, to this day, treat gold and silver like a third rail.
So how has gold performed since it began to trade freely? To the surprise of most, the return for the S&P over this period was 9.9x as the index rose from 99 to 1079. By comparison, gold returned 34x, rising from $35 to $1,226. During this period silver also outperformed the S&P returning 13x on its move from $1.31 to $18.25.
Perhaps even more amazing is the result if we cut the data off at December 31, 1999. As you recall, that was the all-time year-ending high for the equity markets and represented the apex of Internet euphoria. Equally significant was that the moment also captured the peak of political euphoria. Markets believed the global conquest of capitalism was playing out before our eyes, and that gold’s raison d’être was over. That equity peak coincided within 10% of gold’s year-end cyclical low. Against such a bullish backdrop for paper assets, one would expect the risks of equity ownership would have trumped gold, but just the opposite is again manifest. From the date gold began trading freely through December 31, 1999, the S&P’s return versus gold was still less than 2:1 when the S&P closed at 1469 versus gold’s $288.
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