Saturday, October 23, 2010

October 23, 2010—Tristan Morrow

These are interesting times for the stock market and investors. One thing to watch is gold. Gold? Sold by the ounce, gold, on this day in October of 1990, was $371.65—the London p.m. fix price.

Today, two decades later, gold is $1322.50—again, the London p.m. fix price. To sum up, that’s $47.5425 per year per ounce(17% annual return)—but only a 355% return over 20 years!

From the same time in October 1990 to now—October 23, 2010—the S&P 500 went from $304.71 to $1183.08. That’s a meager 278% return on investment. (13.9% annual) Gold is clearly a better investment, right?

The marketing literature on gold will often claim that gold is the “one thing” that will always beat the markets. Actually, you could have sold your S&P 500 investment in 2000 for a 378% return after only 10 years, or in 2007 for 400%—for clearly higher annual returns of 37% and 23%. Gold, conversely, hasn’t peaked in the past anywhere near where it is now, until recently. Also, the “gold versus the S&P500” scenario is just that: one scenario. The S&P500 index being a sort of aggregated average of stocks, there is the implication that 50% of the stock returns are higher than that average—although most will be within one standard deviation of that; my point is that it is not possible for gold to outperform itself the way that an individual stock can beat the index. You buy gold, and it performs at the spot price for gold, and it will never outperform that.

Gold marketing literature will often claim that gold is the “one thing” that will outperform the markets, or that gold is again that “one thing” that will—or has historically—been a top performer. And, indeed yes, you could have purchased gold in 1990 for $371.65 per ounce.

Or, in October 1990, you could have purchased Apple (NASDAQ:AAPL) and, 63 cents in dividends and two 2:1 stock splits later, gone from $9.09 per share to 4x $307.47 …a mere 13536%—yes, 13,536%—return over twenty years.

Your call.

Good luck in your search for what that “one thing” will be, from today moving forward. However, it seems to me that it is unlikely to be gold.

(Historic gold price data from ...cross checked for validity.)

October 23, 2010—Tristan Morrow