Home > Gold vs. Stocks – A Comparison

Gold vs. Stocks – A Comparison

Gold is one of the best-performing assets of the year. If we consider 2019 as well, when the price of gold evolved in a bullish trend, then we can say that gold outperformed other assets. Therefore, investing in gold makes sense from both a long- and medium-term perspective. 

In 2020 gold even made a new all-time high. Therefore, the investing community arguing that gold is the only store of value from a tactical and portfolio perspective have all the reasons in the world to believe that.

However, when investing, the key is to find the right balance between the size of a portfolio and the way the assets are distributed. Sure, an investment that favors only gold did well in the last couple of years. Yet, compared to other assets using the same metric, putting all the eggs in the gold basket alone was a poor decision.

Gold vs. S&P 500 Total Return Index

When comparing two markets, the most important thing is to use the same metric. For example, gold can be expressed in various currencies – USD, EUR, GBP. Therefore, if we compare the price of gold with the Dax (i.e., Germany stock market index) performance, we must use the price of gold expressed in EUR. Also, if we compared the gold price with the S&P 500 total return index (i.e., the benchmark U.S. index), we must use the gold price expressed in USD. As a side note, investors referring to the S&P 500 index also call it “the market” as it is a benchmark for the general stock market.

If we compare gold expressed in USD with the S&P 500 total return index in the last three decades or so, we see a huge discrepancy between the two. More precisely, the price of gold in 1988 was $436.78, using the average closing price. At the same time, the S&P 500 for the same year was 265.88.

Today, gold trades at $1,824 – up a little more than 400%. Not bad for a long-term investment and for the gold’s role of providing a store of value.

However, using the same metric, the S&P 500 trades today at 3663 points – up almost 1,400%. One may argue that the difference is inflation because a gold investment represents a hedge against inflation.

Sure, inflation is one thing. However, it was nowhere so high in the last three decades to justify investing only in gold.

In conclusion, gold does have its place in a portfolio. Only that investing only in gold leaves plenty of other lucrative opportunities on the table.

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