Stocks vs. Gold: How Conventional Investing Wisdom Is Being Stood on Its Head

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Conventional investing wisdom for the past several decades has posited that stocks are the best asset to invest in if you want to make the most investment gains; bonds are the best asset to diversify your portfolio, while still allowing for gains; and gold is the best asset for protecting wealth while avoiding losses and minimizing gains. But what if that conventional wisdom is wrong?

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The mainstream attitude towards investing is perhaps typified by Warren Buffett, who has long been a fan of stocks and not a fan of gold. Buffett likes to trot out statistics about how investing in stocks in 1945 would have netted investors far more gains than gold would have. He conveniently neglects to point out that in 1945, trying to own gold would have gained an investor prison time, not an investment gain.

In more recent investing time horizons, gold has often outperformed stocks, and it looks set to continue that trend into the future. We’re entering an era in which governments continue to add to their already massive levels of debt, central banks aid and abet that spending through enormous purchases of securities and massive monetary expansion, and the outlook for global growth as a result of all that debt looks quite pessimistic.

Just as the 1980s and 1990s were a tremendous bull market for stocks, the 2000s and 2010s were not. While everyone in the investing world keeps hoping for a return to the glory days of Wall Street’s past, those days haven’t been seen in decades, and they likely won’t return. Investors who want to make gains in the future could do better investing in gold than investing in stocks.

How the ‘80s Stock Market Boom Influenced Conventional Wisdom

The 1980s and 1990s were a boom time for Wall Street and for stock markets. Economic growth seemed to be so great that stock markets took off and didn’t look back. It’s hard to believe it now, but the Dow Jones in August 1982 was only at 776 points. That’s a little more than double the high of 381 points that had been reached in 1929, which means about a 1.35% annualized gain from 1929 to 1982. Doesn’t sound too great, right?

But from 1982 onward, stock markets took off. By 1990 the Dow was close to 2,900 points, and by January 2000 it peaked at nearly 11,723 points. That’s about a 17% annualized gain throughout that time period. You almost would have had to try not to make huge gains. It’s no wonder that anyone who invested in stocks during that time period thought that stock markets were a guaranteed way to make money.

The performance of stock markets during the ‘80s and ‘90s also raised the long-term average gains of stock markets, which is why you now hear so many financial commentators talking about the average 7-8% gains of stocks over the long run. But strip out that 18-year bull market and gains become much lower.

Investors need to face the facts: the stock market boom of the ‘80s and ‘90s were an anomaly. In fact, after the 1929 stock market crash, there have really only been a handful of booms that have resulted in stock market’s rise in value: the early 1950s to 1966 boom, the 1982-2000 boom, the pre-financial crisis stock market bubble, and the current stock market bubble. Outside those times, stock markets gains haven’t always been a sure thing. That’s why investors who are looking to make gains in the future need to look outside the box and look skeptically at conventional thinking.

Gold vs. Stock Markets: Do You Know Which Performs Better?

The conventional wisdom states that stock markets always outperform gold. Stocks are vibrant and growing, always making great gains. Gold is static and fixed, doesn’t pay dividends, and just sits there like a rock. Conventional thinking says that you won’t lose money investing in gold, but you’ll lose out on great gains. Is that true?

On August 15, 1971 President Nixon closed the gold window, severing the last official link between the dollar and gold. From then on, world governments would no longer attempt to fix the dollar price of gold. Gold would be allowed to float freely, traded like any other asset. And yet, for much of the time since then, gold has been denigrated as an investment asset. Is that because of its performance?

The Dow Jones closed on August 15, 1971 at 888.95 points, while the S&P 500 closed at 98.76 points. At current market prices, which are near all-time highs, that means that the Dow Jones has seen annualized gains of 7.44% since then, while the S&P 500 has seen annualized gains of 7.49%. And gold? Its annualized gains since then have been 7.75%, and gold is still well off its all-time highs. So much for gold not helping investors make great gains.

The results over the past two decades have been even more stark. The Dow Jones closed the first trading day of 2001 at 10,646.15 points, while the S&P 500 closed at 1,335.63 points. Gold was trading for $268 an ounce. Since then, the annualized gains for the Dow and the S&P 500 have been 5.00% and 4.32% respectively, while gold’s annualized gains have been 9.4%. That means gold has more than doubled the performance of the S&P 500, and nearly doubled the performance of the Dow Jones. That’s pretty impressive.

As every investor knows, past performance is no guarantee of future performance. But many investors only pay lip service to that rule, preferring to ignore it when it comes to stocks. That’s why so many investors have seen poor returns over the past 20 years. They assumed that stocks would repeat their performance of the ‘80s and ‘90s, making huge gains, and they assumed that gold would just stagnate. My, how the tables have turned.

If you have 5, 10, or 20 years until you expect to draw on your retirement savings, how do you expect your investments to perform in that time? Do you expect a return to the bull market of the ‘80s and ‘90s? Or are you concerned that the massive increase in debt throughout the economy will weigh on stock market gains and allow gold to continue outperforming stock markets?

Investors who chose gold 20 years ago look back thankfully now at the foresight they had. And many are probably wishing that they had invested even more in gold. The prospects for gold continue to look bright, while the outlook for stocks looks set to diminish even further. With a looming stock market correction around the corner, stocks are set to plummet, while gold is set to make a big run.

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Do you want to look back 5 or 10 years from now and wish that you had invested in gold? Don’t let that happen to you. Protect your assets and give yourself the opportunity to make good investment gains too by investing in gold today.