Gold outperformed the S&P 500 again in 2011. However, gold did slightly underperform the Dow.
This article had a pretty serious error. It said “HAHAHA!! Gold investors are idiots! Long-term Treasuries crushed Gold in 2011!” You might say “WTF? Treasuries only yield a couple percent?” The point is that long-term interest rates sank in 2011, due to excessive money-printing, quantitative easing, a 0% Fed Funds Rate, and the expectation that the Fed Funds Rate will low for awhile. When yield decreases, bond prices increase. With a 30 year Treasury, a 1% decrease in yield corresponds to a bond price increase of approximately 18%. However, if you’re invested in Treasuries, you’re reinvesting at a now-lower rate. The only reason that long-term Treasury prices soared in 2011 is because long-term interest rates tanked. That gain was created by the State and the Federal Reserve. Rising Treasury bond prices subsidize bank profits, because banks have a leveraged investment in Treasury bonds.
GLD is slightly behind the S&P so far in 2012, but to be consistent, I’m going to use January 1, 2012 as my cutoff date.
I use VFINX as my source for the S&P 500. I use “adjusted close”, so I include reinvested dividends. According to Yahoo Finance, VFINX adjusted close was 113.58 on Dec 31, 2010 and 115.80 on Dec 31, 2011. That’s a gain of less than 2%.
In last year’s version of this post, you had to go back to 1997 to find a time when the S&P would have been a better investment than gold.
Because gold outperformed the S&P again in 2011, you now have to go back to 1995 to find a time when a S&P buy-and-hold-to-the-present investment would have been better than gold. Anytime after 1995, a buy-and-hold gold investment would have crushed a buy-and-hold S&P 500 investment.
I use usagold as my source for the price of gold.
Here are my results. “Cum diff” is the cumulative difference, “Ann diff” is the difference converted to an annualized gain.
| Year | S&P 500 | Gold | Gold/VFINX | Cum Dif | Ann Cum Diff |
| 2012 | 115.8 | $1598.00 | $13.80 | 13.13% | 13.13% |
| 2011 | 113.58 | $1388.50 | $12.22 | 25.33% | 11.95% |
| 2010 | 98.84 | $1121.50 | $11.35 | 34.50% | 10.38% |
| 2009 | 78.12 | $874.50 | $11.19 | 95.37% | 18.23% |
| 2008 | 124.05 | $846.75 | $6.83 | 151.40% | 20.25% |
| 2007 | 117.7 | $639.75 | $5.44 | 187.73% | 19.26% |
| 2006 | 101.78 | $530.00 | $5.21 | 240.10% | 19.11% |
| 2005 | 97.14 | $444.74 | $4.58 | 258.01% | 17.28% |
| 2004 | 87.72 | $409.72 | $4.67 | 270.14% | 15.65% |
| 2003 | 68.27 | $363.38 | $5.32 | 383.91% | 17.08% |
| 2002 | 87.71 | $309.73 | $3.53 | 473.44% | 17.21% |
| 2001 | 99.71 | $271.04 | $2.72 | 466.92% | 15.56% |
| 2000 | 109.64 | $279.11 | $2.55 | 422.67% | 13.57% |
| 1999 | 90.55 | $290.25 | $3.21 | 389.03% | 12.01% |
| 1998 | 70.4 | $288.70 | $4.10 | 337.67% | 10.34% |
| 1997 | 52.87 | $287.05 | $5.43 | 163.95% | 6.25% |
| 1996 | 43.03 | $369.00 | $8.58 | 42.95% | 2.12% |
| 1995 | 31.3 | $387.00 | $12.36 | 42.69% | 1.99% |
| 1994 | 30.94 | $383.25 | $12.39 | -0.41% | -0.02% |
| 1993 | 28.36 | $391.75 | $13.81 | 37.90% | 1.62% |
| 1992 | 26.2 | $333.00 | $12.71 |
If you go back to 1999, a buy-and-hold gold investment outperformed a buy-and-hold S&P 500 investment by 12% PER YEAR!
Here is the same information in chart form:
When viewing financial data over many years, you should use a log scale. Here’s the same information in log scale. On the log scale, it’s easier to see how gold is crushing the stock market recently.
The above two charts show that gold has crushed the S&P 500 over the past 15 years.
If you believe “Gold is money!”, then the above charts show that the stock market severely underperforms true inflation. Over a 10-15 year period, the price of gold should track true inflation pretty well. There are short term-fluctations, but this is a dramatic difference over a 15 year period.
A pro-State troll says “You should be diversified!” That is false. If you aren’t near retirement, your long-term savings should be in whatever provides the highest expected return. If you invest in stocks or bonds, you will get robbed by inflation. The number on your account balance will increase, but it won’t keep pace with true inflation.
A State financial planner will show a chart with exponential growth, showing your savings growing over time. That is a lie. In the stock market, your real return is negative 5% to negative 10% per year. Instead of exponential growth, it’s asymptotic growth. With a return of negative 10%, your maximum inflation-adjusted savings is 10x whatever you save in a year.
Unfortunately, for non-insiders, the stock market is a losing proposition. A stock market investment does not outperform true inflation. Instead of the stock market, you should buy gold and silver and take physical delivery.
This post shows that the stock market has not outperformed true inflation over the past 15 years.
Suppose you don’t invest in a diverse section of the share market.
Suppose you just invest in gold and silver mining companies.
Suppose you just invest in mining, oil and natural gas companies.
Suppose you just invest in hardware tech companies that have their part of the market by the balls and win regardless of Nokia, Windows, Google/Android, Blackberry battles?
That’s a variation of “If you make the right bets, you can win at Roulette.” The stock market is stacked against non-insiders. You may think “If I make the right picks, I can crush the indexes and beat gold.” I don’t believe that, but you’re free to try. If you waste your money in the stock market, there’s more gold available for those of us who don’t believe everything they see on The Communism Channel.
For example, Apple (AAPL) did crush gold over the past 10 years. However, that would have been a lucky pick. There’s no guarantee it will outperform over the next 10 years. I can’t think of any corporations besides Apple that crushed gold over the last 10 years.
Even if a corporation has a near-monopoly, that money goes to insiders and not to shareholders.
Gold mining stocks are a bad idea. Many of them hedge future production, so you don’t profit fully if there’s inflation. As with any corporation, the CEO of the gold mining business can still rob shareholders via option and equity grants.
Gold has higher return and lower volatility than the stock market.
Thank you for your careful analysis.
The thing is with resource companies with stated mineral reserves and a known cost to extract and purify per ounce or per barrel of oil, there is a hard real floor below which the share price cannot fall. There are other things to consider such as mine failures and lack of transport links, but if you are reasonably careful your portfolio can’t sink that much – assuming of course there isn’t some big disaster – and of course these do occur.
I forgot to mention the share price can fall due to hedge fund manipulation and misleading press reports etc.
Well maybe you are right after all! Or partially right!
With mining companies, their expenses *DO* rise when there’s inflation. They have to pay for salaries, equipment, etc.
You mentioned another risk. They own a mine in a 3rd world country, and the government nationalizes the mine or raises the export tariff.
If the mining business hedged with short futures, they can actually lose money when commodity prices rise.
You have the same “CEO robs the shareholders” problem that occurs in any large corporation.
This is common state propaganda. “Invest in gold mining stocks.” That’s a way to trick stupid people into investing in State paper, rather than investing in physical gold and silver.
When you own stock in a mining corporation, you think you own something tangible, but it’s just another type of worthless State paper.
However, if you invest stupidly, that’s more gold and silver available for those of us who aren’t fools. Sadly, I own no physical metal (yet).
So now all the news is saying gold is up..so is this a temporary rise or do people believe that this is the start of a rebound? I am wondering b/c my family is getting ready to buy, and i don’t want them to buy again and then have the market crash like last time. My mom bought gold at the high and silver at the high. She was pretty pissed at me, but i told her it’s being manipulated down and we cannot control the volatility. I don’t know if she should buy more now or wait.
This just barely qualified as “not spam”.
The solution is to dollar cost average. Instead of converting your savings to gold/silver all at once, make small purchases of equal amounts, spread over time. That limits volatility risk.
One Kitco forum poster recommended that people have their portfolios organized as below.
1) One-third cash
2) One-third gold and silver
3) One-third stocks
Presumably in a deflationary environment, gold and stocks will go down and your cash will be worth more.
In the event of a financial meltdown or other disaster, your gold will be worth less than food and tools, but worth something when the system starts to form again.
When the economy picks up, gold will be worth less but stocks will go up.
>When you own stock in a mining corporation, you think you own something tangible, but
>it’s just another type of worthless State paper.
Your thesis is that over a large number of stocks and without inside information or without the ability to manipulate the market (high frequency trading), that the little man (or woman) cannot protect himself as well as saving in gold.
However if you invest in a mining or exploration company that has good reserves and is a take-over candidate, then you can really get good returns on your investment. Even if you come in fairly late in the game, you can make 40% returns if your company is taken over.
But I do see your point. You might win one and lose one and at best just stay even with inflation. Overall you might invest a lot of your time and still not get much back.
What is your take on China buying up gold and the talk about India using gold to buy oil from Iran?
What is your take on the BRICS nations talking about setting up their own bank clearing system (not sure about this)?
Some of China’s leaders aren’t complete tools. They know hyperinflation is coming. They’re keeping their currency reserves in gold instead of inflating US dollars.
When China holds paper US dollars as reserves, they’re indirectly subsidizing US military power. China’s leaders aren’t that stupid.
I read that China is much more liberal than the USA, when it comes to individual gold ownership. In the USA, gold dealers are heavily taxed and regulated. Allegedly, in China, you can walk into many banks and buy or sell gold, which is something you can’t do in the USA.
In many 3rd world countries, individuals have been though hyperinflation, and hold gold as a hedge. Without reliable banks, physical gold is the only way to save.
Currently, the US dollar has a monopoly for oil. All oil transactions are in US dollars. Other countries want to start using their own money to buy gold. Also, if other currencies are used for oil transactions, that’s a loophole around US sanctions. Gold-for-oil as a barter trade is a loophole around US export restrictions.
The only reason why gold prices are down is because they are being artificially manipulated down. The elite bankers apparently do not want the average person holding onto their money (gold and silver) so they are pushing it down through futures so that they can scare the people out of buying it. I really think the smart thing to do is to buy silver. i do like gold too. And i think Jim Rogers who worked with soros has insider info. He thinks gold will skyrocket over the decade. i don’t care if it’s down now. It’s good for people who haven’t gotten in yet. You can get a better price. I think silver will outperform gold in the long run, but it will probably get much lower then it is today due to price suppression. I am buying when the elites crash it.
Make sure that you buy physical and not paper. Otherwise, you’ll get Corzined just like MF Global’s customers.