The 'Gold' Standard for Investment Requires Careful Timing to Achieve Significant Returns

Ken Fisher, the Founder, Executive Chairman and Co-Chief Investment OFficer of Fisher Investments, recently penned a column in UAE publication The National about why gold isn’t quite the solid investment that many believe it to be. The column has been revised for The Newsroom and is presented below:

Gold is often thought of as a “safe haven” for investors seeking protection from volatile markets, but this is not always the case. While the precious metal can provide a hedge against economic uncertainty and inflation, it can also be a risky and volatile investment that requires impeccable market timing or long-term pain. In fact, gold has lower returns than stocks or bonds, but whips investors around more than either.

Gold’s appeal has been particularly strong in recent years, with its value approaching record highs and many investors seeing it as a hedge against economic threats such as bank failures, equity bear markets, and hot inflation. However, before investing in gold, it is important to understand the metal and how it behaves in the market. Gold is a commodity that has no earnings, adaptability or dividends, and since the end of the gold standard in 1974, it has only annualized 5% gains. Compared to certificates of deposit and treasury bills, which pay similar rates, and long-term US Treasury bonds, which annualized 6.7%, gold's returns are lower.

Moreover, gold’s high volatility makes it a particularly risky investment. In terms of standard deviation, a measure of yearly returns volatility around their averages, gold has the highest at 18.6%, while bonds have the lowest at 8.3%, and stocks are in between at 15.2%. This combination of low returns and high volatility means that succeeding in gold takes impeccable market timing, which is often difficult to achieve.

While gold can experience big gains, they are often sporadic, with long stagnations and declines between. For example, gold peaked at $850 in January 1980, and it took 28 years to hit that peak again in January 2008, dropping 56% over two years before gaining 50% in 18 months. Gold then fell 35% over three years before rising 55% over four years and then falling steadily for the next eight years to 2001, down another 46%. Gold reached a record high of $1,895 in 2011, but it took 31 years to achieve this. In contrast, US stocks rose by 28% during this period, despite last year's bear market, while world stocks climbed 23%.

Gold also climbed in just 57% of rolling 12-month periods since 1974, while stocks climbed in 81% of them. This means that even if investors cannot time stocks well, they will still work in their favor in the long term. In contrast, gold is similar to a coin flip, with the price swings increasingly coming from swings in investor demand from exchange-traded funds.

Investors who are considering investing in gold need to ask themselves why they want to do so. For many, it is the recent glittery returns, which is a bad reason to buy anything. Others may insist that it is about inflation or bear market hedging, but 2022 disproves that. While stocks tumbled and inflation soared, gold peaked shortly after the war in Ukraine started and then fell in its own mini-bear market, bottoming shortly after stocks did.

Finally, gold’s long profitless periods need to be reconsidered. Inflation was not zero during any of these periods, which means that gold lost purchasing power to inflation each time. Instead, investors may want to consider gold stocks, which can offer dividends, but they are typically more volatile than stocks overall and tend to rise the most early in stock bull markets.

While gold can provide a hedge against economic uncertainty and inflation, it is a risky and volatile investment that requires impeccable market timing or long-term pain. For most investors, stocks and bonds are simply better investments that can provide better returns with lower volatility.