Gold vs. the S&P 500

I recently ran across a chart pointing out that gold -- represented, in this case, by the streetTRACKS Gold Shares (NYSE: GLD  ) exchange-traded fund -- has outperformed the S&P 500 over the past two years. It made me worry that the chart might inspire some people to move some -- or even most -- of their money from the broad stock market into gold.

In case you're one of those folks, here is some food for thought: Even though gold has spiked sharply in value recently, it hasn't been a long-term winner for most investors. According to University of Pennsylvania finance professor Jeremy Siegel in his seminal book Stocks for the Long Run, here's what a dollar invested in various things would have grown to, from 1802 to 2001. (Amounts have been adjusted for inflation.)

  • Stocks: $599,605
  • Bonds: $952
  • Bills: $304
  • Gold: $0.98

Did you catch that? Over 200 years, you would have lost two cents of your dollar if you had invested in gold.

OK, so if your personal investing timeline is less than 200 years, here are some compound average annual returns to consider:

Period

Gold

S&P 500

1982-2007 (25 years)

3%

11%

1987-2007 (20 years)

2%

8%

1992-2007 (15 years)

5%

9%

1997-2007 (10 years)

8%

5%

2002-2007 (5 years)

18%

13%

Sources: Yahoo! Finance, MeasuringWorth.com

Gold may indeed be trading high right now, and it has certainly rewarded investors who bought at the right time. But "the right time" is clearest only in retrospect. Over most long periods, gold hasn't been the most spectacular investment, while stocks have generally done rather well.

If you still want to invest in gold, a smarter way is through mutual funds. The Vanguard Precious Metals and Mining (VGPMX) fund, for example, sports an average annual return of about 33% over the past five years, and it's invested in companies such as Barrick Gold (NYSE: ABX  ) , Gold Fields (NYSE: GFI  ) , Arch Coal (NYSE: ACI  ) , and Aber Diamond (Nasdaq: ABER  ) . It's closed to new investors at the moment, but such funds often reopen after a while. In the meantime, for mutual funds that we at the Fool have recommended, you can take a free test-drive of our Motley Fool Champion Funds newsletter service.

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Read/Post Comments (6) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2009, at 7:03 PM, casoul87 wrote:

    This has no credibility. For the following reasons: 1) The dollar has lost 95% of its purchasing power since 1913, this article may be referring to a pre-1913 dollar. 2) Since the U.S. has been taken off the gold standard ($35/oz) by Nixon, gold has risen to $950/oz+. 3) And in terms of even short-term investments, the best 1-yr return for stocks (DOW) has been 31.1% as compared to a 198.8% from rare coins, or even 100.2% from gold bullion.

  • Report this Comment On September 22, 2009, at 12:59 PM, dgoodm wrote:

    This article is ridiculous.

    The closing value of the S & P in 1968 was 100, and in 2007 it was around 1575.

    Gold in 1968 was $35 an ounce, and today is over a $1000.

    The S & P meanwhile has fallen to 1300 recently. Gold, thus has increased over 2500%, while the S & P has increased 1300%.

    If I had invested a dollar in gold in 1968, and a dollar in the S & P in 1968, it is clear where the profit is focused.

  • Report this Comment On November 24, 2009, at 10:15 AM, GaryKeorkunian wrote:

    This is a ridiculous analysis.

    To try to value Gold in today's market compared to when a Dollar was actually a Dollar makes no sense.

    And if I'm correct wasn't $1 = 1/20th an ounce of gold when we had a gold backed currency. It was fixed at that rate for the first 125 years of the analysis period. Today 1/20th an ounce of gold is worth over $50.

    Interestingly, if you followed this articles advice and bought the S&P in Sep, 2007 (when the article was written) you would be down about 28%. Had you bought gold you would be up nearly 60%.

  • Report this Comment On December 19, 2009, at 8:44 PM, jc2811 wrote:

    VHGI 3rd Quarter 10Q shows positive income; Gold Strategy http://finance.yahoo.com/news/Virtual-Health-Technologies-pr...

  • Report this Comment On August 24, 2011, at 5:12 PM, plan4more wrote:

    Gold is only worth what somebody will give you for it when you want to sell. Gold buyers always buy high. It makes the news as it goes up and you buy. Jump on board. Dollar cost averaging on the S&P 20 years no matter what time on the mountain...you win.

  • Report this Comment On April 05, 2013, at 9:28 PM, monkeyfurball wrote:

    LOL. YOU stupid gold bugs.

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