Personal Wealth Management / Expert Commentary
Fisher Investments Founder, Ken Fisher, Debunks “With Gold, You’re Golden”
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher, challenges the belief that gold is a good option for most investors. As he explains in his best-selling book, Debunkery, in the long-term, history shows how gold yields lower returns and experiences higher volatility (as measured by standard deviation) than myriad other investment classes—including stocks and bonds. According to Ken, to be a successful gold investor, you must be an excellent market timer, which is incredibly hard to do.
Though some think of gold as an inflation hedge, Ken says they should remember that it’s very volatile. Ken explains that gold has historically demonstrated long periods of decline punctuated by short spurts of growth. If you cannot time those short growth periods, Ken says you’re likely to get disenchanted with gold as it slogs through long periods of underperformance.
Gold is something that, to do well compared to other things, you got to be a really good timer. If you're not a really good timer, you got to say, I want the ring on my finger maybe to be gold, and maybe I got some other ornaments that I want to be gold. But as an investment, it doesn't really match, if you will, the gold standard of how you measure what should be a good investment.
So, every month I do another debunk out of my old book Debunkery. Which is full of little short chapters debunking some common myth. Which of course isn't necessarily something that people think of as a myth. Because in our culture, myths go on perceived by so many as reality. So this time I'm going to talk about bunk number 35 in the book, "With gold, you're golden." Now, I have been articulate on talking about gold in a way that most people don't, for a really long time, and it's really simple if you get it.
I'm going to delve into this a little bit, but this book is old and it's got a lot of historical data in it on each of the chapters. I'm going to try to use some of this from the book, as well as some of more recent data, to show you the way to think about this. But, gold is, of course, a particular specific commodity. It is a commodity with a long history that we can see in free markets and we can compare with other things. And the way you would normally do that is to say, "how volatile is it?" "What kind of returns do you get out of it for that volatility?" "Are there other extraordinary things you can say about it?" And with gold, there's a lot you can say.
First, let me make this really simple. The most standard way is to take a long history, see what the total returns have been, and see what the annual standard deviation for the category is compared to other categories. Standard deviation is a measure of volatility. And, turns out gold is more volatile than you think it is. Most people think it's kind of a "steady Eddie" thing you buy and hold for the long term. And of course you can. But it's really volatile. So when you buy it and hold it for the long term, you better be ready for that volatility. In the period since the gold standard was ended, the last vestige of the gold standard in 1974, which the book covers, past the time period in the book to the present, gold has had slightly lower long term returns than just simply US Treasury bonds in dollars. But the standard deviation of it is more than twice as high.
That is to say, it's more than twice as high as the volatility of bonds. And you don't find that very shocking because you don't think bonds should be very volatile. Right? The shocking part is it's got, almost precisely, half the total return per year of common stocks, the S&P 500, with a volatility that's a little over 20% higher. Said that differently, you don't expect gold should be a lot more volatile than stocks with half the return. You follow that? But it get worse than that. Worse than that. You get really, really long time periods where gold loses money, with volatility, and people can't handle that very much. And let me kind of take you through some of that. So after 1974, when the gold standard was broken, completely, the last vestige is gone, gold hit a peak in 1980.
Now we can measure gold back further, long before you ever, while you still had the gold standard, and what I'm telling you will be true, it's just not as perfectly measurable. But it hit a peak in 1980. And I kid you not, it then went downhill like this. For, you count them, 20 years to a bottom. 20 years of irregularly falling prices to a 20 year low before it started back up again. And it did not get to where it matched the 1980 price for, you count them, 28 years in 2008. The reality is it then peaked a little after that. It then fell again. It then hit a peak in 2020. And still has now just getting back to match that three years later.
What I'm wanting you to see is that while the long term return of gold is positive, it's basically an inflation hedge. But it's an inflation hedge that's very, very volatile. And you can almost certainly do better in myriad other capital market structures like bonds. Or like stocks. When you think about individual years going back over history, cutting it one other way, gold is actually positive going back almost as far as you want to measure it in half of years. Whereas in that period from 1974 to present, the stock market has been positive in 81% of years. And if you just go back to the beginning of accurate measurement with daily pricing and annual pricing precisely in the history of the US stock market to 1925, it's positive a little over 65% of years.
So what do you want? The one with the higher returns or the lower returns? The higher would be stocks or bonds. What do you want? The higher volatility or the lower volatility? You want the lower volatility relative to the returns. That would be bonds or stocks. And what do you want? The ones that are positive more of the time or less of the time? You'd like the ones that are positive more of the time, not less of the time. Which would that be? That would be bonds and stocks. So what I'm saying to you is this, and I'm not saying to you, you shouldn't have anything do with gold. I'm saying gold is something that to do well compared to other things, you got to be a really good timer.
If you're not a really good timer, you got to say, I want the ring on my finger, maybe to be gold, and maybe I got some other ornaments that I want to be gold. But as an investment, it doesn't really match, if you will, the gold standard of how you measure what should be a good investment. Which is returns relative to volatility, relative to consistency. And for that you have to look elsewhere.
Now there's more that you can do that's not in capital markets and investing as well. But then someone will say, "But I'm not buying gold. I'm buying gold stocks. And that's different." And it is different. And the gold stocks may pay a dividend and there's nothing wrong with that. But the fact of the matter is, gold stocks typically, not always, but typically, fall into a subcategory of the stock market that moves when smaller, value stocks move. Not always, but usually. And that's fairly volatile and not totally consistent with the overall market.
But what I really want you to see is, if you're thinking this is an inflation hedge, remember, it's a very volatile inflation hedge. That more of the years than not in history, in aggregate, I started to misspeak myself, that has very, very long periods of losing money and then has short spurts that are steep when it makes money, like the run up in a few years to 1980. The run up in a few years to the peak around 2012. The run up in a few years to the peak around 2020. If you can't time those, you're very likely to get disenchanted with gold over the longer periods first that it falls, before it runs.
If you're buying gold, you really don't want to be buying it after it's had a big run up. Because usually after a big run up, you're in for a long period where you don't get that again. You follow? If you're not a really good timer, if you can't time stocks which are positive most of the time, if you can't time bonds which are positive even more of the time than that, if you can't time things that are easier to time, gold is really tricky.
So, my advice is ask yourself, how good are you at that? And how much are you prepared to get a low return with high volatility, and a low consistency of returns over years, and suffer long periods where they decline without getting discouraged? They can hold on, waiting for the other side. If that's you, hey have fun! But for most people, that's not the case and you'll find gold is more frustrating than rewarding. Thank you very much for listening to me.
I very much hope you enjoyed this video as part of my series on debunking Common Market Myths. To watch more videos like this, click the link on the screen and make sure to subscribe to Fisher Investments' YouTube channel. Thanks so much for listening to me.
See Our Investment Guides
The world of investing can seem like a giant maze. Fisher Investments has developed several informational and educational guides tackling a variety of investing topics.