Has Gold Been a Good Investment Over the Long Term?

Gold is considered a safe investment. It is supposed to act as a safe haven when markets are in decline, because the price of gold typically doesn’t move with market prices. As a result, gold also can be considered a risky investment, as history has shown that the price of gold does not always go up, particularly when markets are soaring. Investors typically turn to gold when there is fear in the market and they expect prices of stocks to go down.

Furthermore, gold is generally not an income-generating asset, though there are some gold bonds. Unlike stocks and bonds, the return on gold is typically based entirely on price appreciation. Moreover, an investment in gold carries unique costs. As it is a physical asset, it requires storage and insurance costs. And, while gold is traditionally thought of as a safe asset, it can be highly volatile and drop in price.

Taking into consideration these factors, gold works best as part of a diversified portfolio, particularly when it is acting as a hedge against a falling stock market. Let’s take a look at how gold has held up over the long term.

Gold vs. Stocks and Bonds

When evaluating the performance of gold as an investment over the long term, it really depends on the time period being analyzed. For example, over certain 30-year periods, stocks have outperformed gold and bonds, but over some 15-year periods, gold has outperformed stocks and bonds.

From 1990 to 2020, the price of gold increased by around 360%. Over the same period, the Dow Jones Industrial Average (DJIA) gained 991%. If we look now at the 15-year period from 2005 to 2020, the price of gold increased by 330%, roughly the same as the 30 years considered above. Over the same period, the DJIA increased by only 164%.

So, over the longer term, stocks seem to outperform gold by about 3-to-1, but over shorter time horizons, gold may win out. Indeed, if we go way back to the 1920s through today, stock returns blow gold away.

Turning to bonds, the average annual rate of return on investment-grade corporate bonds going back to the 1920s through 2020 is around 5%. This indicates that over the past 30 years, corporate bonds have returned around 330%, similar to gold. Over a 15-year period, the return on bonds has been lower than that of both stocks and gold.

A Historical Perspective

To gain a historical perspective on gold prices, from January 1934, with the introduction of the Gold Reserve Act, to August 1971, when President Richard Nixon closed the U.S. gold purchase window, the price of gold was effectively set at $35 per ounce.

Prior to the Gold Reserve Act, President Franklin D. Roosevelt had required citizens to surrender gold bullion, coins, and notes in exchange for U.S. dollars. This effectively made investing in gold extremely difficult, if not impossible and futile, for those who did manage to hoard or conceal quantities of the precious metal.

Using the set gold price of $35 and the price of $2,000 per ounce as of the first quarter (Q1) of 2022, a price appreciation of approximately 5,700% can be computed for gold. From 1971 to Q1 2022, the DJIA has appreciated in value by around 3874%.

The Bottom Line

As with any investment, it’s important to consider the time frame of investing, as well as to study market research to gauge an understanding of how markets are expected to perform. Gold is not a foolproof investment; as with stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy.

With all investment portfolios, diversification is important, and investing in gold can help diversify a portfolio. This is especially important during market declines, when the price of gold will often increase.