Finance

How to Construct a Fair Price Comparison of Gold vs. Stocks and Inflation

On November 21, 2014, when the gold price was down in the dumps, USA Today published an article titled, “Gold’s cheap, but look before you leap.”  In that article, the popular national newspaper used 1980 as their starting point for comparing gold’s long-term performance to stocks or inflation.  However, 1980 was gold’s bubble peak year. If USA Today had picked a more neutral starting point – say, 10 years ago (2004) or 50 years ago (1964), or even 100 years ago (1914), gold would have been the clear winner, but USA Today, like other publications, misleadingly used gold’s bubble peak year to show gold in a negative light.

USA Today missed a great opportunity. Since their article was timed to celebrate the 10th anniversary of the birth of the first major U.S. gold exchange-traded fund (ETF), they could have used the past 10 years for their time comparison.  The leading gold ETF (GLD) was launched on November 18, 2004, when gold was $442.  On the same day, the Dow was 10,572.  Since then, the Dow is up 67% and gold is up 178%!

My award-winning Metals Report began weekly publication almost 10 years ago, in August of 2005.  Since then, we have compared gold to stock prices since 2000 and 2005.  At the time, 10 years ago, we didn’t know that gold would explode in price from around $450 a decade ago to $1900 in 2011 or $1200 today, but gold has clearly beaten every major stock market index since either 2000 or 2005.

For instance, in the 15 years since the dawn of Y2K, gold is up 327% and silver is up 218%, but the Dow Jones Industrial index has gained just 54% and the broader S&P 500 index has risen by only 38%.

Here are the raw numbers for gold, Dow stocks and inflation over the last 5, 10, 15, 25, 50 and 100 years:

Year-end          Gold price        Dow Jones       CPI

1914                  $20.67                             54.58           10.1

1939                  $35.00                           151.43           14.0

1964                  $35.00                           874.13           31.2

1989                $398.60                         2573.20         126.1

1999                $290.25                       11497.12         168.3

2004                $435.60                       10783.01         190.3

2009                1087.50                       10428.05         215.95

2014                1199.25                       17823.07         236.15*

*Consumer Price Index; through November, 2014 (latest month available)

 

This table gives us the raw materials to construct long-term price comparisons.  Gold has clearly beaten inflation (as reflected by the monthly Consumer Price Index) in every time period over the last century.

 

Gold vs. Inflation                                                                                            Who Wins?

In the last 100 years, gold is up 58-fold vs. 23-fold gains in CPI inflation.                 Gold wins

In the last 75 years, gold is up 34-fold vs. 17-fold gains in CPI inflation.                   Gold wins

In the last 50 years, gold is up 34-fold vs. a 7.6-fold gain in CPI inflation                  Gold wins

In the last 25 years, gold is up 201% vs. 87% gains in CPI inflation               Gold wins

In the last 15 years, gold is up 313% vs. 40% gains in CPI inflation               Gold wins

In the last 10 years, gold is up 175% vs. 24% gains in CPI inflation               Gold wins

In the last 5 years, gold is up 10.3% vs. 9.3% gains in CPI inflation               Gold wins

 

The comparison between gold and the stock market is not so clear-cut, since the Dow Jones index is the only comprehensive index we can use that goes back a full century.  Even then, the Dow has changed dramatically from decade to decade.  General Electric (GE) is the only stock that remains from the Dow Jones index of 1914.  An ounce of gold is still an ounce of gold, so we would be comparing apples and oranges by using the 1914 Dow. Still, gold compares favorably with the Dow over the last 50 years:

 

Gold vs. the Dow Jones index                                                             Who Wins?

In the last 50 years, gold is up 34-fold vs. a 20-fold gain for stocks    Gold wins

In the last 25 years, gold is up 201% vs. 593% gains for stocks                      Stocks win

In the last 15 years, gold is up 313% vs. 55% gains for stocks                        Gold wins

In the last 10 years, gold is up 175% vs. 65% gains for stocks                        Gold wins

In the last 5 years, gold is up 10.3% vs. 71% gains for stocks             Stocks win

A fair comparison shows that gold beats inflation over any long-term time horizon, while gold and stocks are both good long-term investments, so it pays to hold meaningful positions in both stocks and gold.

The next time your see anyone use a negative chart about gold’s performance, use this article for your ammunition to write a letter to the editor yourself.  Remember that if you control the “end points” of any chart, you can control which way the “trend points.”  Any fair analysis of gold’s performance over the long term shows that it beats any paper currency ever printed, and it often beats the stock market, too.

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Keith
6 years ago

Ivan says you cannot eat gold and asks did you “Ever try to eat paper or digits?”.
My questions are: Did you ever try to sell gold for what you paid for it? Why pay a premium for gold coins instead the market value for gold bullion? Why buy gold coins from a broker or dealer instead of directly from the U.S. Mint?

mg4
6 years ago

Good article. We need more of these type balanced articles to get a clear picture of the market and how it works.

Ivan Berry
6 years ago

There seems to be no bias in this article, and it just goes to show how so many try and use statistics as a selling point by choosing where to start the sell. If you use the silver/gold figures during the governments attack on the Hunts, all bets are off as to credibility.
As a hedge against inflation (too much fiat paper/digitized money), the metals cannot be beat. Stocks (and to a great extent, bonds also) have become fiat as well. If it’s printed on paper, it may not be worth anything if a real hyper crash were to occur. With an EMF attack (electromagnet force), even digitized data may be gone, and forever.
True, you cannot eat gold. Ever try to eat paper or digits?

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