Gold and Precious Metals

Does gold outperform stocks? (Part I of II)

Twice in a week I’ve heard a similar claim. Supposedly, gold has outperformed US stocks over the long run. Can it really be true that this lustrous lump is a better investment than the most successful companies to come out of American capitalism? I decided to check.

Any claim – backed by enough confidence, stated over and over again, and  delivered with sufficient panache – can creep into broad acceptance. It doesn’t matter how inaccurate it is.

“Donald Trump is a self made man.”

“Everyone can be whatever they choose to be, if only they work hard enough at it.”

“The USA spreads peace and democracy throughout the world.”

“All the Star Wars films have compelling plots and acting.”

“When it comes to investing in stocks, dividends are more important than capital gains.” (See “Stock investing for supermodels” for a simple debunking of this particular myth.)

A great many people believe each of these ridiculous claims, despite plenty of evidence to the contrary. Successfully navigating through life is often about working out which claims ring true and which ones are lies.

Rational explanations can be found for what’s driving them one way or the other each day. But just because they’re rational doesn’t mean they’re right.

When it comes to markets they do what they always do in the short run: they move up and down. Rational explanations can be found for what’s driving them one way or the other each day. But just because they’re rational doesn’t mean they’re right.

The reality is that most of the time no one really knows what’s driving markets, at least in the short term. But looking at the long sweep of market history gives us pretty good clues as to what to expect in the long run. And so we turn to some unlikely claims about gold.

But first a quick round-up of some other things of note:

  • US Federal government debt exceeded US$19 trillion for the first time. It’s now 105% of GDP, compared with 65% before the global financial crisis. You can add another 20% or so of state and local government debt as well. Just like every other developed country, the USA continues to go bust.
  • Ferrari N.V. (NYSE:RACE) has been crashing. As we warned back in October, shortly after the shares were listed, this iconic brand looked massively overpriced. Since then it’s down 37%, not helped by poor profits.
  • Alphabet Inc. (NASDAQ: GOOG), the company formerly known as Google, has become the most valuable company in the world, with a market capitalisation of US$550 billion. This is on the back of earnings that are up (another) 15%. Not bad for a company that’s less than 18 years old.
  • In fact all of the top 4 most valuable companies in the world are now US technology companies. Google/Alphabet is followed by Apple Inc (market cap US$ 528 billion), Microsoft Corporation (US$424 billion) and Facebook Inc. (US$330 billion). The other tech company in the top 10 is Amazon Inc. (US$262 billion).
  • These are all very different companies with very different valuations placed on their stocks. I’ll dig into them a little further in the near future, with some thoughts on safe ways to invest in tech.
  • Safe ways not including Twitter Inc. (NYSE:TWTR), an online platform for succinct pronouncements and proclamations. The stock was listed in November 2013 and promptly rose by two thirds within two months. It reached a hyped-up high of US$73.31 by 26th December of that year. Back down at US$15.57 at the time writing it has now crashed by 79%. Despite this the company is still valued at US$11.9 billion. It loses over half a billion dollars a year, with no sign of turning a profit for the foreseeable future.
  • Moving away from tech, let’s turn our attention to China. A Chinese chemical company, China National Chemical Corporation, intends to pay US$43.7 billion to buy Swiss agribusiness Syngenta. Gone are the days of one way foreign capital flows into China. We’d better get used to Chinese capital flowing out to the world.
  • Also in China, it turns out that 900,000 people have been defrauded by a giant ponzi scheme. Ezubao, purportedly a peer-to-peer (P2P) online lending platform, turned out to be a giant party fundraiser for founder Ding Ning. According to Reuters there are 3,600 similar P2P platforms in China. As with the bubble and bust of Chinese domestic stocks during 2015 (see here for more), Chinese private investors are having to learn the hard way that if something sounds too good to be true, then…well, you know the rest.
  • And finally, Hong Kong’s housing market is crashing. Prices are down 10% in just 4 months. This is a long overdue correction of a massive bubble, which we first warned about as far back as 2013 (see here). The MSCI Hong Kong index of stocks is down 30% since May last year. According to data from the Economist, the last Hong Kong property crash saw prices fall 65% in the six years between third quarter 1997 and third quarter 2003. Expect house prices, and stocks, to fall further.

Back to gold. As long time readers know, I believe gold should be a part of everyone’s investment portfolio. It’s insurance from financial distress in a highly indebted, and therefore inherently unstable, world. And there is massive and growing physical demand coming out of the ever-richer emerging market giants of China and India…and elsewhere. This is likely to drive the price up, sooner or later.

But gold is special. In the same way that Star Trek has fans that dress up to go to conventions – the “Trekkies” – gold has its own hard core following – the “bugs”.

Gold bugs live, breathe and practically eat the stuff. They are the ultra hard core of the hard asset advocates.

As with any group of highly committed believers there are those who exaggerate the benefits of their chosen vocation. Some even construct elaborate conspiracy theories, about gold price suppression by evil bankers and such like. Certain aspects of the wilder claims may even be true, if difficult to prove.

Fortunately the claim that I’m testing is easy enough to prove or disprove. Has the US dollar price of gold outperformed US stocks over the long run, as the “ore-al” optimists claim? All we need to do is dig into the data.

First let’s note that gold has had a good start to 2016. At US$1,129.50 an ounce it’s up 6.1% since the new year, during a period of turbulence and uncertainty in commodity and stock markets in general. That’s as good a performance as long dated US treasury bonds, the world’s more mainstream safe haven of choice.

Gold’s performance is even more impressive given that the US dollar is also up.

Gold’s performance is even more impressive given that the US dollar is also up. The US dollar trade weighted index – which measures the dollar against currencies of the USA’s trade partners – is up 2.3% this year. Usually, when the dollar is strong, the dollar price of gold tends to fall. Not so at the moment.

Why is this? There is some evidence that Chinese gold imports are up again, and ETF investments have also risen modestly. But there could be other factors at play.

In any case, I have a bigger question to answer: whether gold has really been a better investment than stocks over the long run, as some claim.

More to come…

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.