Gold’s performance as an investment in recent years has been impressive by any standard—and not least when compared with equities. Even allowing for the recent decline from around $900 to around $750 an ounce, gold has doubled or tripled in value since the Millennium, depending on what dates you choose to compare gold prices.

Equities, on the other hand, have unfortunately proved the old adage that stocks are highly volatile, so you have to be prepared to hold them “for the long haul.” Compared to the highs the stock market hit only about a year ago, the recent decline of about 40 percent in equities wiped out roughly $8 trillion in wealth, including some $2 trillion in retirement accounts. 

But perhaps, you might suspect, it is misleading to measure such losses from last year’s all-time peak stock values.

A more forgiving comparison would begin with the S&P 500’s post-2000 low of 776.8 on October 9, 2002, in the wake of the dot-com bubble and of 9/11. Six years later, as of November 6, 2008, the index was only about 130 points higher, at 904.9.

That made for an anemic six-year rise of 16 percent—relative to the index’s lowest level of the decade.  
Over the same interval, gold’s price rose by 136 percent. The increase was from $319.35 on October 9, 2002, to Thursday's closing London price of $754.50 an ounce. (For more on the behavior of gold prices, see our current Research Report article, “Gold as a Barometer of Subprime Fear.” If you are not a current subscriber, you may subscribe here.)

In short, and as the chart illustrates, a one-dollar investment in an S&P 500 index fund in late 2002 would have been worth $1.16 on Thursday. A one-dollar investment in gold would have been worth $2.36.

Putting it another way, people who had made gold a part of their investment portfolio were better protected against the stock market’s volatility than those who had not.

Does that suggest that you should now buy gold? Not necessarily. In our view, the purpose of owning gold is to have money, not to make money. Attempts to time the market for gold are likely to fail, exposing the investor to the risks of buying high and selling low.

But suppose you wanted to buy gold to diversify your portfolio—or simply to have gold as an asset?  Guidelines can be found in a February 2005 AIER Economic Education Bulletin entitled How to Hold Gold. It considers three practical approaches, each with strengths and weaknesses. The first two are buying gold coins or, indirectly, buying stock in mining companies. A third, more recent approach is to invest in gold exchange-traded funds (GETF’s). Similar to an indexed mutual fund, a GETF’s market value tracks the London price of bullion. The largest of these is the SPYDER Gold Trust listed on the New York Stock Exchange as GLD. A competing product is the iShares Comex Gold Trust, listed there as IAU.

As always, AIER provides the names of these funds solely as a matter of information. The Institute does not provide individual investment advice, nor do we receive any forms of remuneration from these funds or any brokers.

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