Gold's return anything but precious for investors
'Gold passes US$1,000 an ounce'
SCMP headline, March 14
Gold bugs whom I know tell me that I should hang my head in shame. I have said for years that buying gold is a duff thing to do and people should go for stocks instead.
Big mistake. Gold is way up. Stocks are way down.
For a measure of just how wrong I have been, look at the chart comparing the price of gold against the performance of Hong Kong stocks over the past 25 years.
At the end of March 1983, gold was trading at US$414 an ounce. It is now above US$1,000 an ounce. This is more than 2.4 times as high as it was in March 1983. You can see this astounding price jump represented on the chart by the red line that crawls along the bottom of the chart. Hot stuff, huh? Just smokin'.
The blue line shows you the comparable performance of the Hang Seng Index over that period, up 21.4 times from its 1983 level. Yes, it has come down recently while gold has gone up, and in both cases these movements have been sharp ones. But are they really playing in the same league? Really, I mean?
There is more to consider here. Stocks pay you dividends. Gold does not. It just sits in a vault and collects dust. Let's adjust for this by looking at a total returns measure of the Hang Seng Index, which assumes that you have reinvested all your dividends over the years. That's the green line.
This total returns index is up 51.9 times from its March 1983 level by my calculations and, if you want to quibble with my calculations, go ahead. You will never make gold's 2.4 multiple come anywhere near the total returns of the Hang Seng Index over the last 25 years.
And, by the way, I haven't taken account of the fact that you have to pay vault fees to store gold. You can probably reduce the 25-year gain to a multiple of under two times after doing so. I also forgot to mention that Hong Kong consumer prices have risen 2.7 times over that period. In real terms, you've lost money on gold.
So you see how wrong I have been in this matter of stocks against gold, oh so wrong. Oh yes.
But I hear you. Stop cheating, you say. It's wrong to measure this relative performance by picking a convenient starting date 25 years ago. For contrast, pick a more recent starting date, one that puts gold's performance in a better light.
Okay, we'll do that, in fact we'll make it the best possible light. We'll pick July 21, 1999, when gold bottomed out at a record low of US$252.90 an ounce. How has it done since then?
Well, I'll grant you that gold has done better than the Hang Seng Index since that date. The Hong Kong stock market in July 1999 was in the throes of a silly internet bubble that popped nine months later. Do the comparison a year earlier and stocks win again, but not when measured from July 1999.
There is no reason to restrict the comparison to Hong Kong stocks alone, however. Try stocks in Pakistan. They have been up more than 10-fold since July 21, 1999, far better than gold. You could have had much better returns out of Russian and Peruvian stocks, too.
And why keep it to stocks? As the table shows, a number of dross metals such as lead, nickel and copper have also done much better than gold over this period. So have soft commodities such as wheat, rubber and palm oil. So has petroleum. Even the streets of Belfast had something better for you. Gold is at the bottom of my list, despite it being set up to make gold look good.
Here are the facts. It is not so much gold that has gone up as the US dollar that has gone down. Holders of US dollars have looked for a refuge from this in commodities and have found it in many more commodities than gold alone, and better ones too.
It once meant a great deal that gold is lustrous, easily worked, does not rust and is comparatively rare, but none of this means much any longer except in backward countries where governments steal from people and impose barriers to the flow of capital. In such places, gold can still serve as a decent store of value.
For the modern world, however, gold's time is past. There is no such thing any longer as a precious metal. Buying gold is a gamble, at best a speculation, but certainly not an investment. It's rated in my book alongside horses, casinos, football scores and slot machines.