Quick quiz: What has lower returns than stocks or bonds, but whips investors around more than either?
Answer: Gold, that glittery metal approaching record highs, drawing headlines and forecasts projecting higher highs ahead.
But beware: Always forgotten, succeeding in gold takes impeccable market timing or long-term pain. If you cannot time stocks, do not try gold.
Gold’s appeal parallels its 10.4 per cent rise through early April, bringing it back over $2,000 an ounce.
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But before buying gold, you need to understand it and how it behaves. It is a commodity that has no earnings, adaptability or dividends.
Since 1974, when the gold standard finally ended, it annualised 5 per cent gains. Sound good? Certificate of Deposits (CDs) and Treasury bills pay that now.
Long-term US Treasury bonds annualised 6.7 per cent over that span. America’s S&P 500 Index doubled that, annualising 11.9 per cent.
Those lower returns make sense if it had low volatility. Gold does not. Consider one-year standard deviations for the three asset classes mentioned, a measure of yearly returns volatility around their averages.
Bonds’ standard deviation is low — at 8.3 per cent. You expect stocks' famously volatile standard deviation at 15.2 per cent. But gold’s is shockingly the highest at 18.6 per cent. More volatility. Much lower return. Bad combo.
Low returns with high volatility pinpoints a stark truth: To shine in gold, market timing is a must.
Gold’s gains can come big — but sporadically, with long stagnations and declines between. The recent pop above $2,000 illustrates this.
Now closing in on its $2,063.40 August 2020 peak, gold is only now, 32 months later, nearing flat. In parallel, US stocks rose by 28 per cent — despite last year's bear market. World stocks climbed 23 per cent.
Consider several darker realities: After a late 1970s boom, gold peaked at $850 in January 1980.
It hit that again in January 2008 — 28 years later. But first, it dropped 56 per cent over two years, gained 50 per cent in 18 months, fell 35 per cent in three years, rose 55 per cent over four years and fell steadily over the next eight years to 2001 — down another 46 per cent.
That next boom pushed gold to a record high of $1,895 in 2011 — but 31 years later. Consensus presumed even more gains ahead, especially with eurozone sovereign debt and banking fear exploding while equity markets endured a deep correction.
But no. Gold dropped 44.6 per cent through to 2015’s low, not regaining the $1,895 level until 2020.
If you can time that volatility, you surely need no advice from me. If you think you can, you are fooling yourself. Most investors buy gold high and much later — as frustration sets in — sell it low. It is timing or long-term low returns with wild volatility.
Similarly, gold climbed in just 57 per cent of rolling 12-month periods since 1974. Stocks? 81 per cent. Even if you cannot time stocks well, they work in your favour in the longer term. For gold, it is similar to a coin flip.
Recall: It is simply a commodity with limited industrial use — plus jewellery. Gold’s price swings increasingly come from swings in investor demand from exchange-traded funds, launched during 2000’s bull market.
So, timing gold requires timing sentiment swings. In my 51 years of managing money, I have seen no one with any reliable history timing sentiment swings … in anything.
If gold suddenly has your eye, ask yourself why. For many, it is the recent glittery returns. Chasing heat is a bad reason to buy anything. Some will insist it is about inflation or bear market hedging.
But 2022 disproves that. While stocks tumbled and inflation soared, gold peaked shortly after the war in Ukraine started — then fell in its own mini-bear market, bottoming shortly after stocks did — 5 per cent less but directionally the same.
Gold’s recent climb parallels the 15 per cent-plus rise. That isn’t what good hedges do. And no sane person buys gold to move largely parallel to stocks — but like a single more wildly volatile stock hoping it shines brighter — as is the case with Tesla.
Finally, rethink gold’s long profitless periods. Inflation was not zero in any of them. Hence, gold lost purchasing power to inflation each time.
Gold stocks instead? OK. And they may offer dividends. But as a group they are, again, more volatile than stocks overall and typically rise the most early in stock bull markets (and if you can time that, you can time the stock market).
Usually, they simply act in the same way as smaller value stocks, although they do add the magic of capitalism to the commodity.
If you can time gold, more power to you. But for most investors, stocks and bonds are simply better.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $160 billion of assets under management