Rolling Returns: Gold Vs. Stocks And Bonds
Summary
- Building on recent work on the topic, this article examines rolling returns of Gold, Stocks, and Bonds from the early 1970s to the current period.
- Over shorter horizons, Gold can outperform stocks 30%-40% of the time, but as that horizon expands to decades, Gold almost always underperforms both stocks and bonds.
- Gold is likely best deployed tactically in risk-off environments for stocks. Given its low realized returns and high volatility, it is an expensive macro hedge to carry structurally.
In a recent article entitled Gold vs. Stocks, I illustrated the long-term returns of the precious metal versus the S&P 500 (SPY) and a long duration Treasury Index (TLT). The article sparked a great deal of reader interest with 134 comments at the time I am writing this follow-up. In that article, I showed the long-term total returns and volatility of the three asset classes from 1973 to 2018. Gold has produced the weakest total returns with the highest variability as depicted below.
Gold has recently had a bit of a pop - climbing 7%+ in each of June and August - amidst global macro uncertainty and a climbing stock of negative yielding bonds around the globe. In that previous article, I was trying to illustrate that while gold has had a moderately negative correlation with stocks over time, it has historically been an expensive hedge given its low realized returns and high volatility.
Using monthly returns for gold, the S&P 500, and long Treasury bonds back to 1973, I calculated rolling returns for various holdings lengths. In my head, the long-term returns to Gold look much like the picture below where I have calculated rolling 30-year returns. The first calculated period is February 1973 through January 2003, inclusive.
Over that extended time period, which covers much of the investible horizon for many of us on Seeking Alpha, Gold has never had a three decade period where holders of the metal have done better than holders of stocks or long Treasury bonds. Some might question why the dataset starts at 1973. That is the longest dataset available for the bond index. Furthermore, I am using a series of an ounce of spot gold measured in dollars. Before the early 1970s, gold and the dollar moved together since they were linked by the gold standard, which the U.S. exited under the Nixon administration.
That first table (low returns, high volatility) and first graph (long-run underperformance) suggest limited holdings of gold. To others, however, rolling returns of gold versus stocks and bonds look more like the next graph. Over shorter time intervals, gold has had periods of outperformance, primarily during risk-off environments like 1974, 1980, and 2008. Overall, this analysis has 548 rolling 1-year horizons, and gold has outperformed stocks in 214 of them (39.1%). Gold has outperformed bonds in 224 of them (40.9%).
Between rolling 1-year returns where Gold outperforms stocks 39% of the time, and rolling 30-year returns where Gold never outperformed stocks in this dataset, we are going to typically see a declining likelihood for Gold outperforming as the horizon extends. By showing these graphs, I want to demonstrate this fact for readers and also highlight the environments when Gold has actually done quite well.
Over rolling 3-year horizons, Gold outperformed stocks 34.3% of the time, and outperformed bonds 36.2% of the time. The largest outperformance came during the late 1970s and early 1980s. The most recent prolonged outperformance for Gold was during the Global Financial Crisis and in its immediate wake as global central banks employed new monetary accommodation tools.
Over rolling 5-year periods, Gold has outperformed both stocks and bonds 39% of the time during this nearly five decade sample period. Interestingly, Gold was more likely to outperform over five years than three years in the sample study. Roughly one-third of the time, Gold averaged double digit returns over a five year horizon.
Over rolling 10-year periods, Gold has outperformed stocks 28% of the time and bonds 34% of the time. Gold averaged 20% annualized returns over a decade through mid-2011, a period that overlapped part of the tech bubble and the Great Recession.
Over rolling 20-year periods, Gold has outperformed stocks and bonds in roughly 9% of observations. As you can tell by the graph, most of the periods with 20-years of relative outperformance by gold are ending in the current market environment. These periods feature two major drawdowns for stocks (tech bubble, financial crisis) that lead to subnormal equity returns. Over the trailing 20-years, Gold has averaged high single digit returns (8.3% annualized through September 2019). Some commenters in the last article noted that the recent 20-year period includes an increased ease of Gold ownership through ETFs that may have structurally boosted demand and returns.
For me, this analysis suggests that Gold is best used as a tactical instrument in risk-off environments for stocks. A long-term position in gold reduced portfolio returns of a stock and bond portfolio over this entire sample period. Over long-time intervals, this position also would not have reduced portfolio volatility - despite the negative correlation with stocks - since the instrument was itself quite volatile. Gold has had its episodic moments where it would have provided a ballast to portfolio returns in declining stock markets, but owning it over long-time intervals for those moments of outperformance would have proved defeating to growing wealth.
The high returns to bonds shown in these graphs are unlikely to repeat over forward decades as the starting coupon today for Long Treasuries (just over 2%) is much lower than in this historical study. Part of the compensation for bonds is for future expected inflation. As bond yields have come down, the market's expectation for inflation has come down too. With part of Gold's allure a hedge against the declining purchasing power of the dollar, lower future inflation as implied by the market may also reduce Gold's future returns.
You have to time your entry and exit into Gold appropriately. Given Gold's low long-run expected returns and high volatility, timing a Gold bet may be done more effectively through reducing your equity exposure and beta on the margin or through cheaper financial hedges than through a long bet on Gold.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore, inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
This article was written by
Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (70)
Yeah. Those are the ones I am talking about. Reducing the gold percentages has an adverse effect on the historical performance, at least taking into acount drawdowns and recoveries. I just find it interesting that gold by itself is such a lousy performer.Thanks for the response.
Having said this I would not have rode gold down from it's high of around 1900$ but, if you had, you still would be 55% positive today over an equal spy investment.
States stocks historically have been safer than long-term government
bonds for investors with long holding periods. >>>But the article also shows that the conventional wisdom has only been true for investors who held their portfolios for more than 25 years. <<<<For practical purposes, that may be too long a holding period for most investors. Over the years, for investors who have held their portfolios for shorter periods, both stocks and bonds were exposed to substantial risks, and stocks did not necessarily outperform government bonds. This implies that in making asset allocation decisions, investors should think carefully about how long they will be able to hold their portfolios undisturbed and how much risk they are willing to bear."www.kansascityfed.org/...2. A basic financial planning principle: "If a buy-and-hold investor with no particular view about market conditions or future returns wishes to have a fairly predictable amount of wealth at some future date, that investor should hold a portfolio with a duration that is roughly equal to the investment horizon."Per the folks with Vanguard: It is reasonable that any long-term stock/bond portfolio--5 years horizon or more--- should factor in the sensitivity of the equity allocation to rate changes by incorporating a "duration" estimate.My "duration" estimation right now for the S & P 500 is around 38 years.I have no idea what your retirement horizon might be, but putting it all together, here's the approximate duration of the classic60% stocks / 30% bonds / 10% cash portfolioat this time ...(0.6 x 38 years) + (0.3 x 6 years) + (0.1 x 0 years) = 25 years.Take-away: Stocks have very long-durations, probably longer than a long-duration treasury bond!!For more detailed insights on using equity duration in financial planning, if you plug this whitepaper title (below) into a Google search, you can download a PDF by the folks at S & P Dow Jones Indices:"Applying Equity Duration to Pension Fund Asset Allocation: A Review of S&P 500® Duration."
Year -----------------vs. Euro---------------vs. US dollar
2008----------------+9.7%-----------------+4.3%
2009-----------------+21.1%--------------+25.0%Source: Goldrepublic.comThere is now around $16 T of negative-yielding debt across the world, and IMHO, that calls for a little "insurance." "Gold is the mirror image of the world's unquestioned and misplaced confidence in the institute of central banking." James Grant
I don't think stocks are worth the risk either with Warren and MMT on the horizon. I think John Hussman has calculated that price levels would have to triple to justify current valuations.
There isn't a law that says investors must own any stocks and bonds.
