US Edition
Ken Fisher founded Fisher Investments and built a fortune estimated at $6.3bn. He writes a monthly column for Telegraph Money
Are gold’s go-go days here? Bullion bullishness is rising. Advocates anticipate interest rate cuts will further turbocharge its rise. But be careful before acting on that.
Gold requires impeccable market timing. What’s more, it is a dull drag. Despite what many think, returns are lower, and more volatile. If you can’t time stocks, don’t try timing gold. Let me show you why.
Gold chatter has perked amid its 11.4pc climb (in dollars) since early October – to hit an early December intraday record. While some cite geopolitics and 2024’s looming elections as supporting the “safe haven’s” rise, more pin it on falling interest rates. Lower rates render lower bond payouts, providing less competition for no-yield gold. So the logic goes.
But first, you need to understand how gold behaves.
It is a commodity, without earnings, adaptability or dividends. Its 6.9pc year-to-date return, in pounds, is right around its long-term average. From 1974, when the last gasps of the gold standard vanished, through 2022, gold annualised 7.3pc gains in pounds and 5.0pc in US dollars.
Sound good to you? UK stocks annualised 11pc. In sterling, global stocks annualised 10.5pc. US stocks more than doubled USD gold returns – 11.9pc. Even 10-year US Treasuries annualised 6.7pc total returns (yield plus capital growth) while gilts returned 8.4pc.
Yet surely gold’s “stability” justifies its bland returns? No. Consider the one-year standard deviation, a measure of yearly return volatility around their averages. Through November, gold has a sharply higher standard deviation (19.1pc in pounds) since 1974 than world stocks (14.9pc). Some safe haven.
Low returns with high volatility reveal a stark truth: for good returns with gold, timing is crucial.
Gold’s gains can boom big, but they are sporadic – with long stagnations and deep declines between. The recently celebrated intraday pop above $2,100 in dollars shows this.
Hovering under its August 2020 peak of $2,067, gold is only now, 40 months later, almost flat. US stocks are up 44pc since then in dollars. In pounds, while gold is a wee 2.5pc above 2020’s high, the FTSE All-Share is up 37pc. Stocks’ dominance over gold on both sides of the pond has come despite 2022’s global equity market swoon.
Gold’s stagnant stretches aren’t new. After a late-1970s boom, gold peaked at $850 on Jan 21 1980. It didn’t regain that mark until Jan 2 2008 – fully 28 years later. That boom pushed gold’s record high to $1,895 on Sept 6 2011.
Analysts expected more upside, especially with eurozone sovereign debt and banking fear exploding, while UK stocks suffered a deep correction. Wrong. Gold dropped 45pc through 2015’s low and didn’t see that $1,895 high again until October 2020. Nobody can time that volatility.
Also, gold’s returns in pounds are positive in 62pc of rolling 12-month periods since 1974. In dollars, it is in positive territory in even fewer periods – 58pc.
UK and US stocks, meanwhile, each rose in 80pc of those periods in their respective currencies. Hence, even if you can’t time stocks well, holding long term works well. With little industrial utility outside jewellery, gold’s fluctuations stem mostly from sentiment swings, which defy timing.
If gold beckons to you, ask yourself why. For many, it is the recent glittery returns. Chasing heat is always a bad reason to buy anything. Some say it is about inflation or bear market hedging, but 2022 disproved that. Gold initially climbed after Russia invaded Ukraine, near record levels in pounds and dollars early that March. But then it dropped with stocks to a just slightly later bottom. Since its low, gold has climbed alongside world stocks. A good hedge shouldn’t parallel stocks’ swings.
Moreover, British and US inflation averaged a hot 9.5pc year-on-year and 8.4pc, respectively, while gold endured its 2022 slide. It didn’t hedge. And rethink gold’s long profitless periods. UK inflation wasn’t flat or negative during them. Gold lost purchasing power during those periods. Some hedge.
As for the notion that falling rates foretell glittering returns, that is doubly dodgy. First, no one knows for sure if – and when – rate cuts might come. Central bankers don’t know themselves what they will do next week or next month – how can you?
And long rates? If falling long rates boost bullion, they should show a strong negative correlation. Yet gold and 10-year gilt yields have a -0.17 long-term correlation – meaninglessly puny.
Gold stocks? They may offer dividends, adding capitalism’s magic to the commodity, but as a group they are, again, more volatile than broader markets. They typically rise most in early equity bull markets and usually act like small stocks.
If you can time gold, you need no advice from me. But for most investors, stocks and bonds function better.
Ignore gold’s glitter – the stock market is far better
The belief that stability makes up for dull returns is proved wrong again and again