Investing in gold isn\u2019t a get rich quick scheme. It\u2019s normally part of a long-term strategy of asset protection and portfolio diversification. In fact, for many investors, investing of any sort isn\u2019t a get rich quick scheme either.<\/p>\n
While we may often think of stock market investing as gambling, that\u2019s only because day traders, option traders, or high frequency traders tend to attract a lot of media attention. There are still a lot of investors out there who treat stock markets the same way many of us treat gold, as part of a long-term process of building wealth.<\/p>\n
But despite the knowledge that investing should be for the long term, many of us get wrapped up in looking at short-term, day-to-day, or even intraday prices of financial assets and commodities. We look at stock market indices, bond yields, gold and silver prices, or the price of oil. We obsess over why XYZ isn\u2019t doing as well as we thought it would, and when its price might recover. And all too often we or those we know make decisions based on short-term price movements, rather than assessing our investments through a long-term lens.<\/p>\n
That\u2019s true of many gold owners today, who are wondering why gold hasn\u2019t been climbing in price. After all, stock markets have been hammered in recent days by the prospect of more Federal Reserve rate hikes. And since gold and stocks are \u201csupposed to\u201d be inversely related, gold should be going up while stocks are going down, right?<\/p>\n
Well, it isn\u2019t quite so simple. So here are a few reasons why gold isn\u2019t shooting through the roof right now, although that doesn\u2019t necessarily mean that it couldn\u2019t in the future.<\/p>\n
The conventional wisdom states that rate hikes are bad for gold. This could be for a number of reasons. Among them are the fact that rising interest rates push bond yields higher and make bonds more attractive investments. But if you actually look at the statistics, it doesn\u2019t bear out the conventional wisdom.<\/p>\n
Let\u2019s look at the last two cycles of rate hikes, from 2004 to 2006 and 2015 to 2018. From January 2004 to July 2006 the Fed hiked its target federal funds rate from 1% to 5.25%. In that same timeframe gold went from around $400 to over $600 an ounce.<\/p>\n
From November 2015 to December 2018 the Fed hiked the federal funds rate from 0.00-0.25% to 2.25-2.5%. And during that timeframe gold went from around $1,140 an ounce to around $1,300 an ounce. So clearly rate hikes don\u2019t necessarily have a negative impact on gold.<\/p>\n
Conventional wisdom also says that gold and stocks are inversely correlated, so that when one is going up the other is going down, and vice versa. Certainly there are times when that is borne out, such as the US bear market from October 2007 to March 2009, when stock markets lost over 50% of their value while gold gained more than 25%.<\/p>\n
But what about those periods of rate hikes above? Rate hikes are also supposed to be bad for stock markets, yet from January 2004 to July 2006 the Dow Jones Industrial Average rose from about 10,400 points to about 11,200 points, while the S&P 500 rose from about 1,110 points to about 1,280 points. And from November 2015 to December 2018 the Dow rose from around 17,800 points to around 23,000 points and the S&P 500 rose from about 2,100 points to 2,490 points.<\/p>\n
That just goes to show that you can\u2019t always trust the conventional wisdom, and you often have to take it with a grain of salt. Even over the long term there isn\u2019t really any correlation between gold and stocks, either positive or negative. Since 1971, when President Nixon closed the gold window, gold\u2019s annualized growth rate has been 7.56%, versus 7.27% for the Dow and 7.44% for the S&P 500. And since 2001, gold\u2019s annualized growth rate has been 9.05%, versus 5.25% for the Dow and 5.07% for the S&P 500.<\/p>\n
Gold also has a reputation for being an inflation hedge and gaining value in the face of high inflation. During the 1970s, for instance, gold\u2019s annualized rate of growth was 30% per year over the course of the decade. That\u2019s phenomenal growth, but will gold repeat that the next time inflation becomes entrenched?<\/p>\n
So far we haven\u2019t seen any indication that gold will grow like that in the current inflationary environment, although inflation hasn\u2019t lasted nearly as long today as it did during the 1970s. So in that sense the jury is still out. But gold is supposed to do well in inflationary environments and thus far its performance has been decidedly mixed. What gives?<\/p>\n
Getting back to the part about gold being a long-term investment and not a get rich quick scheme, it\u2019s still too early to write the history about gold\u2019s performance during this period. Five to ten years from now we may end up with $3,000 an ounce gold and wonder how so few people had the foresight to see it happening. But hindsight is always 20\/20 and foresight is at best 50-50. You\u2019ll either make the right decision or the wrong one, and you won\u2019t know until possibly much later.<\/p>\n
If you think that inflation will continue to be a problem, or if you think that a severe recession is on the way, then you may decide that buying gold is a good choice for you. You\u2019ll just have to trust that your prognostications about the future are correct, and live with the consequences of your actions.<\/p>\n