True or False? Gold is a good long term investment. You’ve probably heard claims both ways. One claim in the negative from an otherwise insightful analyst:

”Contrary to what most people think, gold and silver are not good long term investments.”
Inflation Guide: Asset Allocation Based on the Inflation Trend

To help settle it, let’s break the statement down into its components.

One such component: Gold is an investment. In order for the composite statement to be true, the component statement must be true. It doesn’t go without saying … many thoughtful people claim it’s not. In a narrow sense, it’s not … at least if an investment is handing over your money to someone else in the hope of profiting. But in that sense, neither is your home, and people refer to home ownership as an investment all the time.

Here at Financology, we don’t believe such finer points of semantics add to real understanding. If you want to call gold an investment, we won’t quibble. It can certainly be part of an investment portfolio. The only heuristic value we can think of in making such a distinction is that we might say gold is the default asset … what you own when you don’t want to invest in anything.

Taking a cue from a former president, we also have to consider what “is” is. Now? For all time? The only way we could verify the truth of the statement either way is for the past. We have a factual, historical record of how the value of gold has behaved in the past. We don’t have any such thing for the future. So if by this statement we mean is gold a good investment now, there’s nothing we can settle; we can only know for sure after we have seen the results.

This point bears consideration because such statements are ubiquitous in financial commentary. Writers frequently make such statements as “ABC is going up”, when what they really mean it has gone up, but want to imply it will go up. Financial prose is loaded with such slop and requires critical thinking to decipher.

With that out of the way, what can we say factually about the performance of gold – as an “investment” or not – after all, if it went up 40%, do we really even care whether it was technically an “investment”?

But wait … one more detail … what is “long term”?

Does a decade qualify? Two decades? Can we agree that if it’s a substantial portion of a typical investors’ career, it qualifies? Similar claims are often made for stocks, but if you examine them carefully, they’re based on data like from 1926 to date, for example, with the implication being that “in the long run” they always “go up”. Setting aside the hardly trivial matter of simple extrapolation of past performance to the future, looking at one and two decade historical time frames, the reliability of “stocks for the long run” is far from assured.

So in the interest of avoiding double standards, let’s put gold and stocks on the same footing. We can easily identify one and two decade time frames where either outperformed the other. 1980-2000 for instance stocks handily outperformed gold. 2000-2020, gold trounced stocks. We can find other historical examples of both. So according to the “long term” test, if stocks are a good long term investment, then so is gold.

The key difference, it turns out, is that stocks have yield. Over the long run, price performance has been similar. The overwhelming majority of it comes not from real gains, but is an artifact of using a depreciating unit of account. In other words, it’s illusory. Like measuring the your height with a shrinking ruler and proclaiming your growth, a figment of fallacy.

That the excess return of stocks has come in the form of yield has consequences. In the aggregate, the higher the yield, the higher the excess return. This in turn is mostly the result of yield itself being a function of price. If a stock pays $1 a year in dividends, its yield at a price of $20 is 5%. At a price of $100, though, its yield is a mere 1%.

The unavoidable takeaway: The higher the prices of stocks, the lower the yield. The lower the yield, the lower the odds stocks will outperform gold.

This is highlighted in the difference between those two-decade periods cited above. In 1980, the yield on the S&P was 4% and change, a reflection of bargain prices. In 2000, the yield on the S&P was 1% and change, a reflection of high prices. In other words, each dollar of yield in 2000 cost nearly three times what it did in 1980. Over the twenty years following 1980, stocks outperformed. Over the twenty years following 2000, gold outperformed.

See Making Stock Market History for a more in depth review.

The yield on the S&P 500 is currently again in the 1% and change range. If it’s fair to say that’s a good long term investment, it’s fair that gold is a good long term investment. At the bare minimum, anyone contending that it is not bears the burden of persuasion.