A longstanding curiosity in the investment business has been the disinterest in precious metals among institutional investors. Whether from the handful of consultants now leading the institutional space, or directly from the stewards of our nation’s pension, endowment, and family-office wealth, skepticism over gold’s portfolio relevance remains fairly pervasive. Because investment professionals are generally well informed, competing in an industry in which performance is king, one would assume any asset class deserving of rightful consideration would enjoy a fair hearing.
In this report, we present a collection of empirical evidence we view as compelling support of gold’s productive role as a portfolio-diversifying asset.
Gold Has Generated Consistently Positive Returns in This Millennium
Eight years of zero interest rate policy (ZIRP) have compressed returns across a wide spectrum of institutional investment regimens. Especially in the pension and endowment world, few portfolios are achieving chartered rates of return. In this environment, we find it puzzling that institutional investors still choose to ignore gold’s market-leading returns. As shown in Figure 1, gold has generated positive annual returns in 14 of the past 17 years. What is even more impressive is gold’s performance compared to the S&P 500 Index, the benchmark for broad U.S. equity performance. Gold’s compound annual growth rate (CAGR) for the 16.75 years (2001 to September 30, 2017) stands at 9.68 percent versus 6.01 percent for the S&P 500 Index (dividends reinvested). Indeed, it is fair to say that since the turn of the millennium, any long-term allocation to gold would have improved total returns for the vast majority of pension and endowment portfolios.
What is it about gold’s performance that is so difficult to embrace?
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
Gold $USD (%)
2.46
24.78
19.37
5.54
17.92
23.16
30.98
5.78
24.37
SP 500 Index (%)
-11.92
-22.10
28.66
10.88
4.91
15.78
5.57
-37.00
26.45
Year
2010
2011
2012
2013
2014
2015
2016
9-30-17
CAGR
Gold $USD (%)
29.52
10.06
7.14
-28.04
-1.72
-10.42
856
11.10
9.68
S&P 500 Index (%)
1506
2.11
15.99
32.37
13.68
1.37
11.95
14.24
6.01
Source: Bloomberg; S&P 500 Index returns reflect reinvested dividends.
Figure 1: Annual Returns of Gold Versus S&P 500 Index Since 2001 (2001 to September 30, 2017)
To us, the most interesting aspect of gold’s dogged performance since the beginning of 2001 has been the wide variety of financial, monetary and asset-market conditions that have prevailed during the various years in which gold has advanced. Along the way, every popular variable to which some portion of consensus attributes strong gold correlation has oscillated repeatedly, yet gold has advanced in the overwhelming majority of these years.
Gold Has Provided Strong Protection of Real Purchasing Power
Now that the S&P 500 Index has almost quadrupled from its March 6, 2009 low (666.79), few plan sponsors would equate gold’s potential portfolio “alpha” with that available among U.S. equities. However, as shown in Figure 2, the S&P 500, measured in gold terms, remains 64 percent lower today than at its 2000 peak! During the past two corrections in the S&P 500, during which the index declined 50.50 percent (2000-2002) and 57.7 percent (2007-2009), gold provided unrivaled protection of real purchasing power. We are aware of no reasoning to suggest gold’s portfolio-protection benefits will prove any less potent during the next correction in U.S. equities . In fact, the slopes of the lines in Figure 2 suggest gold’s portfolio-insurance value has rarely been more compelling.
