Gold should be dead, but somehow it’s still adding value

Yes, some people prefer it in jewelry. It is used in some technological equipment, and sometimes, still, in dentistry. But so what? According to authoritative data from the World Gold Council, even all those uses only account for about half of the world’s supply each year. Logically, this should mean that there is a gigantic glut of gold and that its price would be in free fall.

But it isn’t. Gold is beating U.S. stocks and bonds this month. And this isn’t even a rarity. I’ve run some numbers and have found a couple of things that could be very important to retirees, and for all of us suckers saving for retirement.

Even though, according to traditional financial theory, they really make no sense at all.

Don’t miss: Gold headed for best week since March after U.S. inflation reports

Also see: Why gold will beat the stock market in the coming weeks

The first thing is that over the past century including some gold in your portfolio alongside stocks and bonds has genuinely added value. It has produced higher average returns, less volatility and fewer of those disastrous “lost decades” where your portfolio ended up whistling Dixie.

The second thing is that this peculiarity has been showing no signs of letting up in recent years or decades — even though, if anything, gold makes even less sense today than it used to.

Let me explain.

As usual, I’ve tapped the excellent database maintained by the NYU Stern School of Business, which tracks asset values going back to 1928.

Over that period, a conventional so-called balanced portfolio invested 60% in the S&P 500
SPY,
-0.06%
index of large-company stocks and 40% in U.S. 10-year Treasury bonds
TMUBMUSD10Y,
3.828%
has generated an average return of 4.9% a year in “real” terms, meaning above inflation.

A portfolio that’s 60% invested in the S&P 500, 30% in the bonds and 10% in gold
GC00,
-0.20%
earned a slightly higher average, 5.1% a year in real terms. But the volatility was lower: The portfolio that included the gold had a lower standard deviation of returns, and a much higher “median” return, meaning the middlemost return if you ranked all the years from best to worst. The portfolio including gold beat the traditional one by five full percentage points in total over the typical 10-year period, and failed to keep up with inflation for 10 years on only five occasions — half as often as the portfolio consisting exclusively of stocks and bonds.

Nor is this just about olden times. The portfolio including 10% gold has beaten the traditional 60/40 by an average of 0.4 percentage point a year since President Richard Nixon finally killed the gold standard in 1971. And it has beaten the traditional portfolio by the same amount, an average of four-tenths of a percentage point, so far this millennium. (The 60/40 portfolio has done better if you start measuring only in 1980, as that ignores the golden 1970s but includes the long bear market for gold of the 1980s and 1990s.)

And gold has added value in five of the last seven years (while in the other two it was effectively a tie).

It’s not so much that gold is a great long-term investment on its own. It’s that gold has seemed to shine when others, specifically stocks and bonds, have failed. And it still does. It held up during the crash of 1929-32. But it also held up during the crash in 2002. And in 2008. And 2020.

A financial expert told me this was “hindsight bias.” But so is most financial analysis.

When your financial adviser tells you what you might reasonably expect from large stocks, small stocks, international stocks, real estate and so forth in the decades ahead, he or she is basing that on history. (In some cases this has been downright hilarious, as when advisers said you should still expect “average” historical returns of 5% a year from Treasurys, even when they had only a 2% yield.)

I’m danged if I know why. But so far this year, once again, you’ve been better off in a portfolio of 60% stocks, 30% bonds and 10% gold than in just 60% stocks and 40% bonds. Make of it what you will.