And still beating stocks

I have to confess to reservations about the title of this post. I’m not at all convinced that gold has in fact hit “all time highs”. But the numbers say it has. And who am I to argue with the numbers? 

At last check, spot gold was trading at $2508.20. It has never before traded at these prices. But let’s deconstruct this statement.

First let’s note that the headline number, despite calling our attention to gold as the variable of interest, in fact embodies two variables. Gold and dollars. It states a rate of exchange between the two, a ratio of their values. Having acknowledged that, we have to admit it doesn’t tell us anything about either one in isolation.

We can, however, consider which one has likely done most of the moving. Gold is the same thing it was last year. And a thousand years before that. Do your gold earrings look like they have gone up? Is your gold coin any different than it was last year?

We can subject our dollars to the same test. But here, almost everywhere we turn, we find that we cannot buy as much with them as we could before. They may look the same, but there are many more of them, and each one buys less groceries, less house, less car, less stocks, than it did a few years ago. We suspect we have uncovered what did most of the changing.

In which case, we think that rather than gold having hit all time highs, the more accurate statement would be that dollars are hitting all time lows.

Speaking of stocks, they provide another means of gauging the purchasing power of the dollar. Again we find it to be plumbing all time lows. But here, it strikes us that this interpretation of stock prices is a bit at odds with what we’re accustomed to hearing in the news. The financial media are positively giddy about gains in stocks as if they reflect unbridled prosperity.

Do soaring gold prices also indicate prosperity?

All we really know from rising stock prices is that they did better than dollars. If stocks were truly “going up”, we should find that they did so whether we priced them in dollars or gold. Alas, their “gains” are only found in the first instance; when using the more reliable form of money, we find they did not.

When priced in gold, stocks have lost ground over the past year. “Fine,” you say, “they’re a long term investment”. Those so indoctrinated by the aforesaid financial media might be surprised to learn that that is also true from the dawn of the millennium to date. In fact, since the ball fell on Times Square, New Year’s 2000, stocks have lost ground in real money.

The math is easy. The price of gold, in dollars, was $288.44. The S&P 500 rung in the new year at 1469.25. Today it closed at 5554.25. That is an increase of 5554.25/1469.25 = 3.7803 times. Applying the same math to gold, we have 2508.20/288.44 = 8.6957 times.

3.7803<8.6957

Ouch.

In gold terms, that’s a loss of over 43% of your capital. Over nearly 25 years. Stocks for the long run?

“But wait, Finster, that’s the S&P 500, and while it’s an important part of the stock market, it’s not the whole thing. There are thousands of other stocks listed in the US and around the world. And you forgot stocks pay dividends; gold doesn’t.”

I’m afraid that doesn’t change the outcome. Stocks, as an asset class, and including dividends, still underperformed gold. According to the FTSE All World All Cap Total Return Index, the total return of stocks, in dollars, from the beginning of 2000 to the end of this week, including dividends, was 4.4829 times.

4.4829<8.6957

Dividends weren’t enough, because the prices were too high. Also simple math: Dividend yield = dividends/price. Investors buying stocks in 2000 were paying very high prices and therefore received very low yields. They were captivated by visions of great capital gains and neglected dividends. So while dividends might have given stocks superior returns in better times, in these, they did not. In the aggregate, investors that overpay for stocks and do not get decent yields do not make money from the companies they buy, they subsidize them.

It hasn’t always been this way. In 1980, stocks were cheap and had rich dividend yields. Over the next two decades, they turned in epic returns, both in dollars and in gold. 

Are better times ahead? For stocks … no. Once again investors have been seized by fantasies of great gains in exciting technologies, and are as a whole paying very high prices and receiving very low yields on stocks as an asset class. Due to the inclusion of a relatively small number of very high priced stocks, the entire global market yields around 1.99%; the US market, where most of the overvalued stocks are concentrated, a paltry 1.37%.

Given the current backdrop and outlook for monetary and fiscal policy, it seems likely that stocks will broadly continue to outperform dollars over the coming years. Alas that’s a low bar … their odds of outperforming gold are not so promising.

All told, long term investors are probably wise to own stocks. But also to underweight those that are overpriced and underyielding in favor of those that aren’t. Generally wherever there seems to be a lot of excitement and nobody even mentions dividend yields or value for the money, they’re probably being called upon not to make money, but contribute it.

And by all means, to also own some gold.