The summer of 2011 saw the original debt-ceiling debate’s market panic. Nervous traders dumped equity holdings. Gold briefly surged to an all-time high north of $1900 per ounce on Sept. 6, 2011.
Advocates of precious metals called investors in stocks "crazy" to hold onto those "risky" assets.
Sixteen months later, gold bugs are still waiting for the next move up. Meanwhile they’ve been traveling on a bumpy road that led to greater than 7% losses.
GLD holders received no dividends over the entire period shown below.
Intrepid investors who stuck with stocks had to withstand one last sickening plunge in October of 2011. Those who hung in there were rewarded with outstanding total returns of more than 28% (including $2.87 per share in cumulative dividends) over that same 1.33 years.
The net difference (plus 28.06% versus negative 7.47%) represents a whopping 35.53% swing in the present net worth for holders of SPY versus GLD. The price of gold would need to be $2219.40 /oz. today to have kept pace with the S&P 500's total return.
Nobody can say for sure what will happen going forward. That was just as true in August of 2011.
Gold is not an inflation hedge. It peaked at $857 in 1980 and bottomed more than 20 years later at under $250 in the year 2000.
There was certainly substantial inflation over even the most recent 16 months. That was yet another period when gold prices fell.
I agree with the hard asset advocates that the U.S. dollar is being intentionally inflated away by the Fed. The best defense against that? Own shares of high-quality companies that can survive and prosper over the long term. Theses companies have the pricing power to counteract inflationary times while maintaining or increasing dividends and earnings.
Fixed income rates are so artificially low as to guarantee negative after-tax, after-inflation total returns.
Equity investing will continue to travel a volatile route. In a ZIRP world stocks appear to be our best and, perhaps, only hope to preserve wealth in the face of political insanity.
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