Gold vs. S&P 500: Chart and Performance, Explained
In Recent Years, The S&P 500 Significantly Outperformed Gold, Except During 2000-2010
Gold is shiny, valuable, and used in wedding rings, but does it make a good investment, especially compared to stocks? The answer appears to be no. But don’t take my word for it; let’s take a look at the raw data.
As shown in the chart below, from 1977 to mid-2024, gold returned just above 6%, in contrast to the S&P 500’s more than 11.3%. But most people don’t invest in gold for the high returns. Instead, they invest in it as a form of safety, an insurance policy against catastrophic market risk, and even a “hedge against inflation.” However, it’s often unclear what that phrase means-- and if gold should have any place in people’s portfolios, regardless of economic or monetary circumstances.
Gold vs. S&P 500 (1977 to mid-2024)
The one extended period in which gold significantly outperformed the S&P 500 was 2000 to 2010, in which an investor would have been lucky if they decided to suddenly put their entire net worth into gold. However, this was the result of two major market crashes, the 2000 tech bubble, and the 2008 real estate crash and ensuing global financial crisis, two things that, while perhaps predicted by geniuses like Warren Buffet (or, in the case of 2008, the controversial and substantially-less genius Michael Burry, portrayed by Christian Bale in The Big Short) would not have been obvious to the average investor.
Courtesy of Portfolio Visualizer. Due to the large discrepancy in performance, I have used a logarithmic scale to represent this data.
As shown in the chart below, gold generated an impressive 15%+ compounded annual growth rate in the years 2000-2010 (compared to the devastating 0.32% of the S&P 500), something which, despite its spike in 1980, would also have been unforeseen by the average investor.
Gold vs. S&P 500 (2000 to 2010)
Courtesy of Portfolio Visualizer.
So, not knowing the future, would a reasonable investment in gold have protected a vulnerable investor (let’s say, a retiree) during that tough decade of two market crashes? Well, you might think so, but the level of protection isn’t quite as high as one might think.
Below, we show a typical retirement portfolio (Portfolio 1) consisting of 60% large-cap U.S. stocks and 40% long-term U.S. Treasury Bonds, not particularly atypical of what many financial advisors and retirement experts might suggest. This portfolio would have generated a depressing (but at least extant) 4.2% return during that decade.
60/40 Portfolio (2000 to 2010)
Courtesy of Portfolio Visualizer.
Now, let’s see if adding some gold makes a difference. We will get aggressive and make gold 10% of the portfolio to see if a relatively large gold investment would significantly enhance returns. I believe 10% is relatively large, as gold is considered an alternative asset, produces no cash flow, and has long-term returns significantly less than stocks, without the safety of Treasury Bonds, so adding more than 10% would be a bit ridiculous, provided one couldn’t predict the future.
Below, we see that a 10% gold allocation (creating a theoretical 60/30/10 portfolio) would not have increased returns much, only boosting them to 4.88%. Considering gold’s poor historical performance, while this would have boosted returns in practice, from the perspective of an investor or advisor managing a portfolio in 2000, it would not have made much sense to add in this allocation.
60/30/10 Portfolio (2000 to 2010)
Courtesy of Portfolio Visualizer.
Alternatives to Gold for the Next “Lost Decade”
Unfortunately, those banking on the historic 10.8% returns of the S&P 500, particularly retirees who were not adding to their portfolio, got royally screwed during the “lost decade” of 2000-2010. No one can predict the future, but this could easily repeat in the years 2025-2035.
Unfortunately, if investing only in broad market indexes based on large-cap U.S. stocks, which are typically considered to have the best risk-to-reward ratio of all equities, there was not much one could do to salvage their portfolio returns during this time.
However, other options exist if one believes another “lost decade” is around the corner. One could diversify away from the United States, which would have been quite perceptive and forward-thinking considering the fast and efficient rise of Chinese manufacturing. However, this rise was hard to predict for those not studying international business. The same global stock market boom is unlikely to happen again due to the increased expense and political liability of Chinese manufacturing and the inherent inefficiencies in the Indian and Southeast Asian economies-- where almost all new manufacturing is going). In fact, since 1986, the global ex-U.S. stock market has only generated a 6.81% annual return, which pales in comparison to the approximate 11% return of large-cap U.S. stocks over the same period.
Below, we see an internationally diversified portfolio comprised of 30% U.S. large-cap stocks, 30% ex-U.S. stocks, and 40% long-term Treasury Bonds. This portfolio would have somewhat outperformed the other options, producing a 5.57% compounded return from 2000-2010.
60/40 Internationally Diversified Portfolio
However, as shown below, we could continue further diversifying into other asset types. However, the enhanced performance of this type of backward-looking diversification would have been extremely hard to predict. For example, if we put 27.5% of assets in U.S. large-cap stocks, 27.5% in ex-U.S. stocks, 5% of assets in U.S. small-cap stocks, and 10% in gold, we could have boosted the portfolio’s performance just a bit further, up to 6.43%.
Courtesy of Portfolio Visualizer.
Further 60/30/10 Diversified Portfolio
Courtesy of Portfolio Visualizer.
However, this is just an example, and it doesn’t mean that small caps necessarily provide diversification for retirement portfolios during most 10-year periods, only that they happened to do so during one very rough 10-year period, something that may not be repeated again. Small caps are generally riskier and more volatile than large-cap stocks, meaning their place in retirement portfolios is mostly questionable. The fact that one or two semi-uncorrelated assets did well during one ten-year rough period far from guarantees that they’ll do well during the next 10-year rough patch. This will have been caused by different economic issues, and the global economy will be in quite a different place than in 2000.
This doesn’t mean there might not be some merit to the idea of uncorrelated assets; it is just that those assets should have a strong and either steadier or inverse performance history compared to the main assets in the portfolio during tough economic times. Without this basic mathematical relationship, choosing uncorrelated assets rests on macroeconomic predictions, which can be shaky at best.
Choosing Individual Stocks via Value Investing
Perhaps the only way to truly ensure against a 10-year market downturn and achieve satisfactory returns is something most investors and advisors choose (and often choose wisely) not to do-- to select individual, high-quality, undervalued stocks. This can be a gamble, as the average investor is not qualified to do this (nor is the average advisor). However, for those with the correct acumen and enough discipline, selecting individual securities could have protected them from the “lost decade” while earning them a very satisfactory return.
Below, I demonstrate a theoretical portfolio of blue-chip value stocks, including Berkshire Hathaway, Verizon, Unilever, Exxon Mobil Corp, Comcast, CVS Health Corp, and Pfizer, as well as then-undervalued tech stocks like Amazon and Apple (as well as, admittedly, a few gold mining companies). Combined with a 40% allocation in Fidelity’s bond fund FBDNX (a stand-in for U.S. Treasury Bonds, considering that no good Treasury ETFs, like TLT, existed in 2000), it would have yielded an impressive 9.44%.
Although this portfolio has the benefit of looking backward, not forward, it would have provided a more than adequate return for all but the most aggressive retirees (and the vast majority of others). However, as previously mentioned, the expertise to construct and maintain such a portfolio does not lie with the vast majority of investors or financial advisors (a reported seven-eighths do not beat the market as of 2023, a number which likely rose during the years 2000-2010).
60/40 Value Portfolio of Individual Stocks
Courtesy of Portfolio Visualizer.
Courtesy of Portfolio Visualizer.
In Conclusion: Gold is for Miners and Traders, Not Investors
Over long (think 15-20+ year periods), there are only three types of people who make consistent money selling gold: miners, traders, and people selling shovels. With companies like Noble Gold constantly hawing Gold IRAs to nervous seniors and soon-to-be retirees-- telling them that the U.S. dollar is in danger and that gold will protect them from inflation-- it’s hard to break the social mystique of that shiny yellow metal. However, unless you got lucky and timed the market right (which almost no one does), in most long-term periods, gold would have been a weight dragging down your portfolio rather than an alternative asset boosting it up.
Like oil, gold is a cyclical commodity and not a cash-flowing investment. Unlike common stocks, gold does not generate cash flow or profit or sell essential (or highly-desired) products and services to wide audiences. And, unlike bonds, gold doesn’t provide a cash flow secured by the real assets of a corporation (or, in the case of U.S. Treasury Bonds, the full faith and credit of the world’s largest corporation, the United States Government).
While gold was once tied to our currency and functioned as an essential medium of exchange, it (for better or worse) no longer holds that place in our economy’s heart. Due to that (and many other reasons), as our examination demonstrates, it probably shouldn’t have a place in your portfolio.
