Performance of Gold Since the End of the Gold Standard
Implications of fiat currency on stock market returns
On the latest Lex Fridman podcast, Anthony Pompliano made a claim that gold has outperformed the stock market since 1971, the end of the US gold standard. I immediately noted down the claim to check out later, and sure enough, it’s true. A dollar invested in gold in 1971 would be worth $34.84 in 2019 while a dollar in Dow Jones would be worth only $32.06. This results in an annualized log return of 7.4% vs 7.22%.
Okay, that’s actually a sleight of hand, because depending on when you start, you could get wildly different results. For instance, if you start in 1980, gold would have yielded you an annualized return of only 2.8% compared to 8.69% if invested in the Dow. In fact, gold only wins 13 out of 49 years (1970-1971, 1997-2006 and 2017). If you look at the year over year returns, you’ll notice that if you missed out on gold’s early year’s bull run, you missed out on much of the outperformance.
Dollar Cost Averaging
Let’s look at it in a dollar cost average method. Suppose in 1970, you invested $1 in gold (or Dow), and every subsequent year, you invested another dollar:
Year 0: $1
Year 1: (y0 * return y0 -> y1) + (1 / price y1)
Year 2: (y1 * return y1 -> y2) + (1 / price y2)
...
Now performance of gold since 1970 is much higher. The gold portfolio would have yielded $1,483 in 2019 while the Dow would have yielded only $780. The exact dates matter less. For instance if you started in 1980 instead, the results for gold vs Dow would be $960 vs $403, respectively.
All the numbers can be found here.
Your analysis sucks
Yes. I know my analysis sucks. I ignore dividend yield, and Dow isn’t necessarily representative of the market, gold has carrying costs, my sources suck, I really need to start at [date], I probably have some math errors or basic misunderstanding how dollar cost averaging actually works, etc.
I’m not arguing for gold as an investment. It’s objectively a silly investment on the surface. Warren Buffet said it best:
[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.
But it has one main property that makes it valuable: it’s scarcity.
Printing money for Covid
Something weird is going on and it started around 1971. If you accept gold as being scarce with a somewhat predictable supply and demand, its value relative to productive assets in society can tell us something. It can be used as a proxy for fixed amount of wealth in the world. When you denominate asset prices against a fixed commodity as opposed to fiat currency, you get a different story about growth and wealth.
This is all under the backdrop of the Federal Reserve printing trillions in new money for covid relief. The money supply increased over 20% year over year. Note that this is change in money supply (0 is the floor - money supply never goes down). This means that ~23% of dollars in existence today were created in the last year.
$6 trillion legislative, $6 trillion from Federal Reserve. The Federal Reserve part includes $2 trillion in Long Term Treasury purchases and $800 billion in mortgage backed securities (MBS). This has nothing to do with protecting homeowners from foreclosure. This is a direct transfer to people who hold these assets (e.g. foreign banks hold the largest amount).
To put those number in context, total spending post-9/11 interventions cost $859 billion and another $648 billion for Iraq (2018 dollars). Vietnam cost us $686 billion. Emergency Economic Stabilization Act of 2008 allocated $700 billion, but only spent $426 billion and recovered $421 billion (a profit!). I don’t think anyone thinks we’re somehow going to recover $12 trillion in wealth. That’s just new money.
But strangely there is no inflation. Obviously you have to exclude asset prices such as the stock market. But that’s a good thing right? We want the stock market to go up. That’s not inflation, that just means we’re more productive as a society. It has nothing to do with transferring wealth to existing asset holders, right? Right?
If you compare stock market total return (dividends reinvested), You can use Wilshire 5000 Total Market Full Cap Index or Wilshire Large-Cap (750 largest firms).
Stock market total return is over +16,000% while Gold gives +4300%
"When you realize printing money just transfers wealth to existing asset holders"
This is some type of layman monetary economics. It's super common, it's like tourette in social media commentary. Nobody really explains this mechanism.
Mainstream economists would explain that asset valuations change when the interest rate changes. When the interest rate is almost zero, printing even more money should not affect real valuation of assets.