While the S&P 500 Index lost over 18% (including dividends) in 2022, gold gained for the year. Today we will discuss why gold may continue to outperform in the current environment, and in the decade to come.
Investing in gold and the S&P 500 Index (S&P) have been popular strategies for investors for several years; 5,000 years for gold, and 66 years for the S&P. While both offer opportunities for growth, there are significant differences between them that can make one a better choice than the other depending on market conditions and an investor’s goals. In this article, we will look at how gold and the S&P 500 have performed over time, highlighting periods when gold outperformed the index, and why we have likely entered the type of environment in which gold has traditionally excelled.
S&P vs Gold
The Standard & Poor's (S&P) 500 Index is a widely followed benchmark of U.S. stock market performance that tracks 500 large companies listed on major U.S. exchanges such as the New York Stock Exchange (NYSE) and NASDAQ Composite Index (NASDAQ). The index is considered an accurate representation of overall stock market performance since it includes some of the largest publicly traded companies in America such as Apple, Microsoft, Amazon, and Alphabet Inc., which owns Google. The index has long been seen as an effective way to measure investment performance over time because it accounts for both short-term movements in individual stocks as well as longer-term trends across multiple sectors of the economy.
Gold has been popular with investors for centuries due to its perceived safety during times of economic uncertainty or inflationary pressures—characteristics that make it attractive to those looking to diversify their portfolios or hedge against potential losses from other investments such as stocks or bonds. Gold prices tend to move inversely with equities markets—when markets decline gold often rises—which can provide investors with an additional layer of protection against losses in their portfolios during times of volatility or downturns in equity markets like what happened during 2008’s Global Financial Crisis. From the end of 2007 to the end of 2009, the S&P dropped from 1468.36 to 1115.10, a loss of -24%. Meanwhile, gold rose from $836.50 to $1,104.00 over the same period, for a gain of 32%.
Over longer periods of time however, there are certain periods where one asset class may outperform another significantly; below we will look at some examples where this has occurred between gold and the S&P500 index over various points in history. My source for the data points below are the from our friends at macrotrends, who provides data in table and graph formats.
- From 2000–2020: From the beginning of 2000 until the end of December 2020, gold increased from $290.85 to $1,895.10, for a gain of 652%. Over the same period, the S&P increased from 1,469.25 to 3,756.07, for a gain of 256%. Certainly, a gain of 256% is not a bad return. But 652% provides more to show for 20 years of waiting. As we will see, there were periods of time within these years where stocks performed better than gold, but the differences were not as significant as the periods of time where gold performed better than stocks.
- From 2001–2011: During this period ending December 2011, the price of gold increased from $272.65 to $1,574.50, for a gain of 578%. Over the same period, the S&P decreased from 1,320.28 to 1,257.64, for a loss of -5% over the same period. Keep in mind that this period of time included the Great Financial Crisis, which was a difficult period for stocks, and a buoyant season for gold. If we focus on the period between 2008-09, we see gold rose +32% while the S&P declined -24% for 2 years. Incidentally, a loss of 24% requires a gain of 32% just to break even, and it can take longer to make 32% than it did to lose 24%.
- From 2013–2016: During this period ending in December 2016, we saw gold drop from $1,664 to $1,151.70, for a loss of -31%. The S&P performed relatively well in comparison, increasing from 1,426.19 to 2,238.83 over the period for a gain of 57%.
- From 2017–2020: This period saw similar performance between gold and the S&P, with gold moving up 65% from $1,151.70 to $1,895.10, and the S&P moving up 68% from 2,238.83 to 3,756.07. This was one of those times where both gold and the S&P rose a similar amount.
The most important performance numbers for us today are forward-looking rather than backwards-looking. The investment management firm Stifel issued a report yesterday that says they believe the S&P will barely make any return over the next 10 years. In other words, a decade with little to show for it except volatility in the stock market. That likely means a roller-coaster ride for those invested in stocks. If the next decade is anything like the decade discussed above from 2001 to 2011, it would be a great time to lighten up on stocks and increase an allocation to precious metals. While stocks did little, gold increased to over 5 times the price. Stagflationary conditions indicate it may happen again.
Normally firms that earn the bulk of their income managing money in the stock market don’t issue reports that are negative to the markets, unless they feel certain of the expected results. As a precious metals analyst, perhaps my projections of challenging times ahead for the stock market should be taken with a grain of salt. But when major investment management firms put out reports warning the public about the products they deal with, we should probably pay extra attention to the issue. In this article, I have highlighted periods of time in which gold has outperformed stocks, and vice versa. We have also seen times where their performance was similar. Based on the patterns we are seeing, it is increasingly looking like the next 5-10 years might be kinder to those who own precious metals.