Our newsletter recently looked at how well stocks have bounced back since the lows of 2009, but another piece comparing stocks to gold during the recovery caught our eye. The argument is pretty simple: even with the incredible rally in the stock market, you would have been better off in gold. Via Alpha Now:
If you still find yourself struggling whether you’re more comfortable being “risk on” or “risk off” in the stock market these days, it might be time to consider something entirely different: the “Gold on” trade. “Gold on” – being long gold– has proven to be a strategy that has beaten the S&P 500 ever since the financial crisis began in 2007.
This got us thinking… picking a single point in time and calculating returns forward from there is nice, but it doesn’t show the whole picture. So, we put together a chart that shows the performance of the SPDR Gold Trust ETF versus the S&P 500 over every possible time period between January 2007 and August 2012 (on a monthly basis). The dates along the vertical axis represent the month you would have made your initial investment, while the dates along the horizontal axis represent the date you would have sold. Each cell shows how much better off you would have been (in percentage terms) if you had invested in GLD instead of the S&P 500. Each cell represents GLD performance minus the S&P 500 performance for the given time period. And what did we find?
(Disclaimer: past performance is not necessarily indicative of future results.
The green regions show when you would have been better off with gold, while those splotches of orange represent time periods when you would have been better off in stocks. The yellow indicate periods when gold and stocks had similar performance. Gold has the clear advantage up until February 2009 – that conspicuous orange streak through the center of the chart. For the last two years, gold’s advantage has been generally negligible, and stocks have outperformed gold in 33% of the periods analyzed.
In the end, it’s not too surprising that gold has tended to outshine stocks – the last five years have been fairly exceptional for the yellow metal, and rather disappointing for the stock market. However, to say that one investment has beaten another for an entire time period is disingenuous at best – it depends on several factors, not the least of which is the timing of the investment. We often read such headlines – xyz investment beat out abc investment over the past 10 years – and intuitively think that means an investment in the former at any time over the past 10 years would have been better than the latter. But as we can see in the chart – that isn’t the case. Overall over-performance does not mean individual time period over-performance.
As the old saying goes – timing is everything.