Friday Finance: I was wrong about everything

Wow you guys, stop the boat!

I just found this website that claims gold beat stocks so far over the twenty-first century:

What might surprise you is that the precious metal has . . . beaten the market for the century, 345.39% versus 70.62%, since December 31, 1999.

And they’ve got this graph to prove it:

Looks like all the information in my book is wrong. Forget about shares, real estate and alternative growth assets. Just buy as much gold as you can and sit on it like Smaug.

You wasted your five bucks. No returns.

Hey, wait a minute. That site is for a company called Bullion Vault that sells gold bullion. Maybe I should check these figures.

I punched the same start and finish dates into Long Term Trends and here’s what came up.

Yellow = Gold; Grey = Silver; Black/Blue/Red = Stocks (the differences between the three stock colours will become important later on):

It’s no lie; Gold wins again. Even Silver beats Stocks, just. The two graphs look slightly different because of the scale on the axes.

Take my book and throw it out the window. Case closed.

Or is it? Just in case, let’s expand the timeline. Maybe that 19-year period was an anomaly. Maybe the Tech Wreck and Great Recession skewed the result and looking at larger numbers will show us the true picture.

Fiddling with the same site, I can stretch the comparison period to the fifty years leading up to March 19, 2021. What does that give us? This time Stocks are only shown in Red and Blue, for secret reasons:

Ah, damn. Silver’s struggling over this period but Gold is still beating Stocks. I’ve been exposed as a fraud.

Alright, time to examine those Stock lines more closely. The Red line is the S&P 500, my preferred index because it’s cleverly weighted to give a fair idea how shares are going in general. If that’s gobbledegook to you, see my book for a layman’s explanation of indexes/indices.

The Blue line is the Dow Jones. That’s another index that’s weighted differently. It’s older than the S&P so it’s sometimes better for long-term comparisons but the weighting system is a bit clumsy compared to the newer S&P. Makes no difference here anyway.

There’s a problem with both these indexes: they don’t include dividends.

There are two ways you can make money from shares: rising share prices (shown in these graphs) and dividends, a payout to all shareholders, which are not shown in these graphs.

Fortunately, the good people at Long Term Trends also offer a graph with a Black line that shows returns from stocks including dividends and assumes they have been reinvested (used to buy more shares). This gives us a more accurate picture because gold doesn’t pay dividends that allow us to buy more gold. Gold just sits in a vault and looks pretty.

Ok, same comparison period, the 50 years to March 19, 2021, with the new stock line including dividends added:

See source for explanation of the vertical dotted line

Yowzah! Stocks including dividends, as shown by the Black line, win big! Take that, Bullion Vault! And you, dear reader, can go and fish my book out of the bin, wash it off and spray with FirBreeze.

To be fair, Bullion Vault wasn’t completely wrong. Look at the second graph on this page: I deliberately included the Black line to show that, for the specific time period they referred to, gold did beats stocks even once you factor in dividends.

There’s one more graph we should look at today. Instead of cherry-picking time periods that back up our own strategy, let’s look at the whole period for which statistics are available.

It seems we can go all the way back to January 1, 1886, through to today, which at the time of writing is March 19, 2021. Yeah, I prepare blog posts that far in advance.

What do we get? Who will win, stocks or gold? Remember, for stocks, keep an eye on the Black line and ignore the less-informative Red and Blue lines for now:

Well, there you have it. Stocks with dividends beats gold massively over the long run – and make sure you reinvest those dividends if you’re building wealth.

One might argue that now we’re off the gold standard, gold is more competitive. However, the 50-year graph we plotted earlier shows that even during the fiat currency period, stocks won.

If you compare the last 5 years, 10 years, 15 years or 30 years, stocks including dividends beat gold. It’s only around the 20-year mark that gold clocks up its anomalous win.

The point of this article is not, ‘Don’t buy gold’. As noted in the chapter on cash and equivalents, gold has its place for some investors.

Rather, the lesson is this: if you’re a young bloke saving for the long term, you need mostly growth assets like shares, real estate or alternatives to build wealth. Unless you happen to strike a good period for gold like the one Bullion Vault identifies, you’ll almost certainly suffer lower returns in the long run.

The comparison site I used for this post is very handy so I want to give them a good plug: here’s a link to their homepage. Go play with it yourself; it’s fun. I love sites like that.

Also available on many other platforms.

One comment

  1. Kentucky Gent · December 10

    Another thing about dividends – when you don’t have a paycheck from an employer, you can spend your dividends without selling shares. Like me! But if you want to spend your gold? Then you have to sell it.

    BTW, I’ve had a Bullion Vault account for nearly 15 years now. Technically, they don’t “sell” gold. They offer a market for trading gold, and they sell STORAGE of gold, i.e. vault space.


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