To me, Gold is considered a safe investment. It is supposed to act as a safety net when markets are in decline or are volatile when there is an era of uncertainty as in this Election Year since the price of gold does not typically move with market prices.
Because of this, it can be considered a risky investment as well, as history has shown that the price of gold does not always go up, particularly when markets are soaring.
Investors typically turn to gold when there is fear in the market. This becomes more concerning in light of the ordinary Federal Deficits being incurred and the prices of stocks are uncertain or speculative when compared to their capitalized value plus when one considers the uncertainty of the prolongness of the pandemic and an acceptable vaccine.
Furthermore, gold is not an income-generating asset. Unlike stocks and bonds, the return on gold is based entirely on price appreciation. Moreover, an investment in gold carries unique costs.
Remember, as it is a physical asset, it requires storage and insurance costs. Taking into consideration these factors, gold works best as part of a diversified portfolio, particularly when it is acting as a hedge against a falling stock market.
Now, let’s take a look at how gold vs. the stock market (stocks and bonds)has held up over the long-term, using the last 15 years as the barometer instead of 30 years, for that is when Federal deficits started to become a way of life with the Federal Government Vs. prior, one might say that the Fed was more fiscally conservative.
When evaluating the performance of gold as an investment over the long term, it really depends on the time period being analyzed. For example, over a 30-year period, stocks have outperformed gold and bonds have been similar to one another.
However, over a 15-year period which is a more pratable period to do a comparative analysis, given the fact that most investor’s strategies are not measured over 30 but 15 years.
Gold has outperformed stocks and bonds where the price of gold has increased by 330%, roughly the same as the 30 year. However, over the same period, the DJIA increased by only 153%.
With regard to bonds, over a 15-year period the return on bonds has been lower than both stocks and gold. To gain a historical perspective on gold prices, between January 1934, with the introduction of the Gold Reserve Act, and August 1971, when President Richard Nixon closed the U.S. gold purchase window, the price of gold was effectively set at $35 per ounce.
As with any investment, it is important to consider the time frame of investing, as well as to study market research to gauge an understanding of how markets are expected to perform.
Gold is not a foolproof investment, as with stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy. With all investment portfolios, diversification is important, and investing in gold can help diversify a portfolio, remember the word diversified, not as a concentrated portfolio asset.
By Bruce WD Barren, Economist
Paul Ebeling, Editor
Editor’s Note: Mr. Barren is a regular contributor to Live Trading News.
Have a healthy day, Keep the Faith!