Fisher Investments Editorial Staff
Commodities, Investor Sentiment, Media Hype/Myths

Gold’s Safety Blanket Myth

By, 02/12/2010

Story Highlights:

  • With stocks' recent volatility, investors might be tempted by gold's perceived stability.
  • Gold is prone to short-term volatility just like stocks and boasts miserable returns over the long term—practically flat over the last 30 years, even including last year's big gain.
  • Even more dangerous for investors, gold historically has been a short-term timing game—since 1973, there have only been six major gold booms, or just 15% of the time.
  • Stock markets may be bumpy right now, but fundamentals still favor the bull market trend while historical returns support stocks' long-term shine.

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When the world gets a bit scary, it's tempting to look for a safety blanket. The object itself has no magical properties, but our minds assign to the fabric characteristics to satisfy emotional needs. While that's fine during thunderstorms and scary movies, this could be detrimental when it comes to investing. For example, when markets take a tumble as they've done recently, some investors reach for one of the investing world's "safety blankets"—gold. Gold fans see the shiny stuff almost as a cure all—an inflation hedge, a stock market correction hedge, and even a weak economy hedge.

But does gold deserve the security blanket mantle? Maybe not. In reality, gold is prone to short-term volatility just like stocks and boasts miserable returns over the long term—practically flat over the last 30 years, even including last year's big gain.

Gold began trading truly freely in 1973, after post-Bretton Woods controls were removed. Since then, gold's returned a cumulative 983% (annualized 6.8%), while global stocks returned 2,229% (9.1% annualized) and US stocks 3,552% (10.5% annualized).* Gold's 2009 run was much hyped in the media, but even then it lagged stocks, returning 24.8% versus 30.0% for the year.

Besides lost opportunity costs, what's even more dangerous for investors? Gold historically has been a short-term timing game. Much of gold's long-term gains have come from very short boom periods. Since 1973, there have only been six major gold booms, each lasting from 4 to 22 months—or just 15% of the total time. Meaning gold's done less than stellar the other 85% of the time. Stripping out the six boom periods would give gold a cumulative return of -67.6% (-3.6% annualized).** Investors would need to time those boom periods well or risk owning an asset with sagging or flat value over time—contrast this with stocks, which tend to rise more than fall over long periods.

Gold's assumed stability and safety is largely a function of sentiment. Remember, gold is a commodity, and thus, its price is driven by supply and demand pressures. Sure, gold may do well during times when there is a high degree of market and economic uncertainty—when fear is high. But even trying to take advantage of these periods amounts to a risky bet on short-term emotion swings, which may not be supported by supply and demand fundamentals. For example, though gold is trading at elevated prices now, its prospects look uncertain. Miners are increasing production in reaction to higher prices, but future demand may decline as buyers balk at the elevated prices and with jewelry consumption (which accounts for two-thirds of global demand for gold) falling 23% last year.

Gold may be an emotional safety blanket for some, but a safe investment? Don't count on it. Meanwhile, stock markets may be bumpy right now, but fundamentals still favor the bull market trend while historical returns support stocks' long-term shine.

*Source: Global Financial Data, Inc.; Thomson Reuters; 11/30/1973-12/31/2009

**Source: Global Financial Data, Inc.; 11/30/1973-12/31/2009

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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