I’ve met a healthy number of people who believe that gold is different, that it has some “real” value that distinguishes it from other assets. If you listen to certain radio stations, the radio announcer will tell you that gold holds its value through thick and thin. I’m biased toward other types of investments, particularly equity. I just don’t see the allure of yellow metal when compared with a corporation made up of thousands of problem-solving people creating products and services in order to adapt to a changing world.
For the study period here I chose 1975 to be generous to gold lovers. 1975-1994 was a period of high inflation and gold was still fairly early in its run. Based on personal experience, I imagine the interest in gold peaked in the early 1980’s, but let’s be generous and see how well gold works as an asset for accumulation and distribution. The average annual inflation rate in this period was 5.49%, so this is a great study of a long-term, high-inflation economic period.
The equity portfolio here is not made up of specific funds but rather three asset classes:
Large Cap Growth
Large Cap Value
Small Cap Value
Each of these is equal weighted and rebalanced annually.
Accumulation Period Results
From 1975-1994 Jane Investor put $500 per month into an account in each of the portfolios. Jane was probably feeling pretty amazing about the progress in her gold account by the end of 1980:
Portfolio 1 (gold): $132,410.35
The equity portfolio was going strong, as well:
Portfolio 2: $80,758.80
However, the future for gold dimmed dramatically in the following years. The difference in ending balance of the two portfolios is dramatic:
Portfolio 1: $280,944.77
Portfolio 2: $1,127,706.71
So on an accumulation basis, equities certainly won out here. Gold provided a very modest return (the time-weighted return was 3.67%). The stock portfolio provided a time-weighted return of 17.75%.
Distributions: Can we fund a retirement with gold?
Now we took $100,000 and invested in each of the portfolios. Jane Investor withdrew $416 per month, which amounts to roughly 5% annually. The distribution was increased each year for inflation. The equity portfolio was rebalanced annually.
Portfolio 1: Gold
Almost! The gold portfolio runs out in 1993, one year shy of our 20 year goal. Jane Investor was a fairly early adopter and that helped. If she had invested the gold portfolio in 1980, when gold fever was higher, the funds would have run out in 11 years.
Portfolio 2: Equity
The equity portfolio is alive and well 20 years later with a 20 year terminal balance of $1,699,347.91. All three of the equity classes did well.
Average Annualized Returns 1975-1994
Large Cap Growth 14.76%
Large Cap Value 17.21%
Small Cap Value 23.88%
Equities delivered in a dramatic way with two very big assists. First, stock valuations were very low at the beginning of this period relative to today. The ten-year price-to-earnings(PE) average in 1975 was around 9. Today the ten-year PE average is close to 32. Second, interest rates were falling during most of this period.