Gold is supposed to act as a safe haven from crisis and a hedge against inflation. But lately, it hasn’t been either.
You would think with the bombastic manchild leader in North Korea threatening nuclear Armageddon and the usual problems in the Middle East, investors would flock to gold.
But gold fell 10% in two days.
Even after the news of the bombing at the Boston Marathon broke, gold continued to slide. That was the most surprising twist in the plot. An attack on American soil should send investors scurrying to gold. Instead they sold it.
This isn’t what’s “supposed” to happen.
Just the Facts, Ma’am
Gold may make investors feel better in times of crisis and financial uncertainty, but it’s hard to argue with the fact that it’s a volatile asset. Since hitting a high in October, the precious metal is down 23%.
That’s why I say if you really want to be sure you’re keeping pace with inflation and own assets that can survive a crisis… forget gold.
You should be looking at Perpetual Dividend Raisers - the stocks that raise their dividends every year.
I’m sure many of you are thinking, stocks safer than gold? That’s ridiculous.
But look at the numbers over the last 40 years, starting right after the U.S. dollar left the gold standard:
Since 1973, long-term investors who went with dividend-paying stocks outperformed the folks piling into gold. An investor who held the S&P 500 for 10 years made an average of 159.3%, while those holding gold earned 86.7%.
What do these numbers tell us? They tell us that over long periods of time, investors are better off holding stocks than gold.
(This doesn’t mean you shouldn’t have any gold in your portfolio. The Oxford Club‘s Investment Director Alexander Green recommends you keep 5% of your portfolio in precious metals. I agree. It’s important to be diversified.)
Best Way to Beat Inflation? Crisis?
Over the past 40 years, inflation has pushed prices higher.
Something that cost $100 in 1973 will cost $524 today. In contrast, $100 worth of gold in 1973 is now worth $1,481. However, $100 worth of the S&P 500 is now worth $1,931 (including dividends received).
So stocks win that battle. They have done a better job outpacing inflation.
As far as which asset is the best hedge against crisis, there are lots of data to test against. We’ve certainly had our share of rough times over the past 40 years.
Think about how many times the spit has hit the fan since the early ’70s - Vietnam, Watergate, high inflation, gas shortages, the Cold War, Iran-Contra, 9/11, the dot-com collapse, the war in Iraq, the financial crisis, etc.
And through it all… stocks have performed better than gold.
The good news for gold bugs is that during the years gold rose in value, the shiny metal was a better performer than stocks. And during gold’s down years, it lost less value. But, as the table shows, gold had almost as many down years as positive years.
That’s a problem, particularly if you’re using it as a hedge.
So what’s an investor to do?
Simple. Buy stocks that raise their dividends every year. These solid companies, such as Johnson & Johnson (NYSE: JNJ) and Kimberly-Clark (NYSE: KMB), not only have been paying dividends every year, but have raised them every year for decades.
Johnson & Johnson, which has boosted its dividend for 50 years in a row, raised it an average of 11.7% per year over the past 10 years. That kind of boost is more than enough to outpace inflation and increase your buying power.
And just as appealing, Kimberly-Clark’s average dividend hike was 9.5% per year over the past 10 years.
These are well-established companies that have been doing their thing for generations. Could they have a bad year or two in the future? Of course.
But I’ll side with history here and assume the companies will continue to grow their businesses over the next decade - and every year deliver more cash back to shareholders than they did the previous year.
And as we’ve seen, these types of stocks more than weather the storm if you have a long-term view. Gold has made a lot of money for investors over the years. But stocks have made a whole lot more. Remember that the next time there’s a crisis.
Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.