Is Gold a Better Investment Than S&P 500?
Gold can be an attractive investment; however, its long-term returns may not always meet expectations.
Gold does not form through chemical reactions like stocks and bonds do, making it a low-correlation asset with your portfolio for diversification purposes.
1. It’s More Valuable
Stocks have consistently produced superior average real returns over gold since 1980, even during its brief stint as an inflation hedge. Even during 2009 to 2020’s great bull market run, stocks outpaced gold by almost three times, turning $1 into nearly three times that amount real terms.
Add quarterly dividend reinvestment and the power of compound growth will only compound it further. Americans have consistently chosen stocks as their long-term investment in Gallup polls, outstripping certificates of deposit and bonds as viable options. While gold may provide better returns during times of economic turmoil, its performance cannot match that of stocks over the long haul; so while gold remains a valuable addition to your portfolio it should not be seen as essential; instead stocks provide you with maximum diversification at minimal expense.
2. It’s a Diversifier
Gold prices tend to surge during times of high inflation, geopolitical unease and economic upheaval; investors often use gold as an insurance policy against riskier stock investments.
However, over the long term stocks have outshone gold. Gold actually exhibits negative correlation with traditional asset classes like US Treasury bonds and stocks.
Gold makes for a poor diversifier; in periods of stable inflation and global economic stability, gold actually underperformed most major equity asset classes in terms of real (inflation-adjusted) returns; one dollar invested would have yielded only $0.26 while investing the same money into one month US T bills and US small cap stocks would have grown into over $4.
Gold doesn’t provide any tangible returns during a broad market bull cycle, when growth stocks experience the greatest returns. Therefore, investing in gold would best serve as a hedge against recession or possible stagflation over the longer run.
3. It’s a Stabilizer
Gold is seen as a low-risk investment because it serves as a store of value during volatile economic environments. Gold prices tend to surge when investors seek refuge from inflation or uncertainty caused by pandemic outbreaks or sovereign debt crises.
Stock prices tend to be highly volatile during these periods and can sometimes experience sell-offs, while gold prices remain stable enough to offer effective diversification when stocks decline.
Gold doesn’t offer an income or earnings potential and provides returns through price appreciation alone, so it should only ever be seen as a tool to build your portfolio’s growth.
Gold’s low correlation with stocks makes it a good way to diversify, although this only applies when held as part of an overall investment portfolio. Most investors may find it more effective and cost effective to purchase stocks instead of gold coins or bars for maximum returns.
4. It’s a Protector
Gold’s price typically increases during times of economic or market instability, helping reduce portfolio risk while at the same time offering limited long-term growth potential compared with equity investments. Gold does not track inflation closely and often experiences greater fluctuations than equities – over time investing one dollar in gold resulted in less real growth than investing it into an equity portfolio composed of global large cap stocks (excluding S&P 500 stocks) plus US small cap stocks ( excluding S&P 500).
Gold isn’t an effective way to hedge stock market losses. Investors have other ways of mitigating risk in an economic downturn, including investing in low-risk growth stocks – one strategy is compounding which allows investors to earn dividends that can be reinvested to grow investments further – but gold may not be. To learn more, sign up for Kiplinger’s FREE Closing Bell e-letter!