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If anything, the current recession has put money in the pockets of gold dealers.
The Wall Street Journal reports a near doubling of bullion sales in 2008, and fears of a prolonged recession, coupled with inflation anxiety has had investors rushing to acquire the gleaming metal for their portfolios.
This begs the question - is gold really a “wise” investment during times of recession? In a series of recent posts, R.D Norton examines the price movements of gold in times of economic downturn. Although he finds that gold prices tend to fall during recessions, the trend is not uniform. Often, prices spike amidst inflation worries as economies begin to regain health. But what about post-recessionary prices? The chart below illustrates this story from an investor’s angle: if you, as an investor were to buy $1 worth of gold in August 1971 (the date when the United States officially repudiated its obligation to redeem dollar claims on gold), how much is that dollar worth now, when adjusted for inflation?
Click to Enlarge.
For the sake of comparison, the chart also shows the value of the same dollar when invested in an S&P 500 index fund over the same time period. (This excludes any fees that might have been charged to the investor).
In 2009, the long-term investor who purchased a dollar of gold in 1971 would find that his investment in gold performed better when compared to the stock market (more precisely, the S&P index fund).
However, consider the case of investors who gave in to the buying frenzy and invested in gold during times of recession. Buyers in the 1980’s peak still haven’t recovered their investment. Those who bought gold during the upward trend in late 1981 realized a near permanent loss on their holdings. Buyers during the 1990’s recession waited nearly 16 years to break even. While there have been some exceptions (for instance, the recession in 2001) in general, over the last four decades, buying gold during or even right after recessions has been a case of “buying high, selling low” for the average investor.
In comparison, buying into market-indexed funds may seem like a less risky choice. Historically, gold has always had higher volatility of returns when compared to the S&P 500 index (a standard deviation of 5.5 percent over this time period, as opposed to 4.5 percent on the S&P). In almost all post-recessionary cases (once again, 2001 being an exception) investors managed to preserve wealth and benefit from gains as the economy regained traction.
For investors who focus on the long term, gold is a wise bet as a store of wealth. However, those who are looking to time their gold purchase and capitalize on short-term gains do not fare as well.
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There is a large amount of qualitative and quantitative data to believe this to be the case.
Check out Ludwig von Mises Institute and Robert Murphy's free market blog for reasons as to why this is.
-Seems like as long as the current economic system holds up, stocks are a better bet (although it was surprising to find the market has done as poorly as it has in constant dollars!).
-On the other hand, if something devastating happens, gold is likely to be more valuable than a broker's monthly report (although you'll probably still need dollars to pay taxes).
-On the third hand, nothing is likely to beat an education (including good common sense) for value -- a good thing to keep in mind.
-So...gold and stocks seem like apples and oranges, and have very different purposes in a person's portfolio.
1. Eric Sarshad - The rates of return have been adjusted for inflation. If you consider a historical average inflation of 3% or so, then you'll find that the average year on year return on the S&P is higher, and close to the 8% average you talked about.
2. RJallo - While it is tempting to construe this piece as investment advice, my intention was to provide a commentary on the relative performance of gold vs the stock market over the last 30 years, especially after recessions.
Also 1.8% contradicts the conventional wisdom that in the long run one should expect approximately an 8% return on equities.
By the way if the investor had pulled out in 2000 when the index was approximately 3.5 dollars per dollar invested in 1971, the return would have been only 4.4%. This is still no where near 8%.
* here is testimony showing a missing half Trillion dollars. Everyone should watch it http://www.infowars.com/bernanke-i-don%E2%80%99t-know-which-foreign-banks-were-given-half-a-trillion/
* here is a link showing the world is discussing dumping the dollar. If this happens it will cause inflation, rising interest rates, and severe cuts in all spending programs. Having some gold and silver could be quite important as things to use to barter. http://www.thetrumpet.com/index.php?q=6347.4806.0.0
* just to break even with next year's federal budget would require over a 50 percent federal tax increase on ALL income levels. And its still not enough. Washington is over spending and leaving a massive debt behind to the kids of today.
* diversification is the key. Throughout history every fiat currency crashed. We too have a fiat currency. Please notice the top of bills say federal reserve note and NOT the U.S. treasury. Thoughout history precious metals have never fallen to zero. The german mark went way down. As did the continental and the zimbabwe currency recently.
* Peter Shiff and a few other economists called this. They are not calling for a recovery at this time.
A fool and their money are soon parted.
UNFORTUNATELY GOLD AS AN INVESTMENT IS NOT VERY GOOD....BUT AS AN INSURANCE AGAINST INFLATION OR SOME OTHER EVENT SUCH AS ANOTHER RECESSION, DEPRESSION OR INFLATION AND/OR WHATEVER OUR CONGRESS OR PRIVATE ENTERPRISES CAN CREATE TO DESTROY OUR ECONOMY.
SO YES...EVERY PORTFOLIO SHOULD HAVE 5 OR 10% INVESTED IN GOLD FOR ASSURANCE...RE-ACTION MENTALITY DOESN'T WORK...IN OTHER WORDS YOU SHOULD HAVE BEEN BUYING GOLD WHEN IT WAS $300.00 AN OUNCE NOT $950.00 AN OUNCE...YOU ALREADY MISSED A TRIPLE PLAY.......