Gold versus Stocks 1

Gold vs Stocks 1

From time-to-time we will be sitting with friends and when the topic of investing comes up it leaves most of us scratching our heads and saying: “Who knows?”  The days of investing based on corporate earnings/dividends/products have been replaced with programmed trading, hedge funds, derivatives, Meme stocks, social media bank runs, and all forms of barely comprehendible logic.  We live in a world where anyone with a cell phone can cause a bank run with little to no justification or knowledge of banking, finance, or investing.  It is a confusing and dangerous time for sure with markets fluctuating daily with little direction or indications of a future path.

Invariably the conversation around a cup of coffee will migrate to gold: who owns it, why, why not, and in what form.  After long, often frustrating, discussions we concluded that people own gold for a variety of reasons and rarely is it completely clear in their own minds as to why.  We know psychologically that gold is advertised and discussed as a storehouse of value in demanding times.  But what may signal tough times for me might signal opportunity for you.  There is no clear roadmap for gold ownership or anything else right now or ever.  Fortunately, our group is polite enough to avoid name calling and derision.

We decided to look at gold more seriously and to resolve what is real and what is illusionary.  What follows is hopefully a fresh and understandable look at gold, but also gold’s performance compared to other markets.  This is neither a recommendation for gold ownership nor a recommendation for stock markets.  Everyone’s financial position is unique to their circumstances, and they must decide what investments fit their needs and seek guidance when necessary.

The Argument Against Gold Ownership

Any conversation around gold ownership that is negative will focus on gold’s lack of income (dividends or interest) and its spotty record of outperforming stocks in short bursts.  The conventional wisdom always is that over the long-haul stocks always go up and gold just stays flat or goes down with oil, politics, and disruptive financial events.  The pro stock market crowd contends that stocks always go up if you are just patient, and stocks keep up with inflation and pay dividends.  Their argument is often bolstered by the hucksters on television selling gold investments in slick ads when the stock market sputters. 

The Argument for Gold Ownership

The counterargument for gold ownership is like looking in a mirror and seeing the exact reflection of the other argument.  Proponents for gold ownership are just as adamant, and just as enthusiastic as to why we must all own some gold.  Their argument is rooted in history, and they see fiat currencies eroding, with the only proven hedge as gold or precious metals.  They also look for stability and certainty of stock markets in troubling times and seek alternatives.  The credibility of gold investing has been hurt by the poor marketing.

Measurement Over Different Time Horizons

Many years ago, a wise investor told me that any economist will give you a rate, or a date, but rarely a date and a rate because then the fact checkers can always prove them wrong.  There is a little more truth here than might seem right, but if we think about the television pundits and their talking points, this statement hits right at the heart of the investing confusion.  Everyone has an opinion, and few want to be pinned down as to when it will come true.  But the time horizon is the key to answering this perplexing question on gold versus stock ownership and we believe we can illustrate this clearly.

For this analysis we have looked at three time periods.  Long is defined from December 31, 2000, to 2023, medium is from December 31, 2010, to 2023, and short is from December 31, 2020, to 2023.

These are the base dates from which we measure.  This gives us decades of data but removes all the noise of daily fluctuations.

What We Measured and Why

One of the real problems with creating this analysis is what to measure and its relevance.  We have chosen six different financial/monetary/market measures based on our experience.  If your opinion differs that is fine, make charts of your own that better illustrate your perspective and send them along.  We are happy to publish alternative opinions.

  • Gold Bullion – Gold is often maligned by those focused on the stock markets, but it is still a storehouse of value.  If gold were of no value except for jewelry and industrial purposes, then Central Banks would not hold any.  They would have complete confidence in their fiat currency and gold would simply be a relic of the past.
  • Total National Debt – We have seen how our economy behaves, or misbehaves, when Congress throws out all logic and begins to spend uncontrollably.  The resulting debt becomes an issue because it pumps too much cash into the economy, fuels inflation, and makes interest payment of the debt unsustainable.
  • M2 Money Supply – M2 is the broadest measure of how much money is in circulation.  If historical economics still holds true, then the underlying cause of inflation will remain “too many dollars chasing too few goods.”
  • S&P 500 – The Standard and Poor’s 500 Index is a broader measure of the condition of stocks than the DOW Jones Industrial Average and includes stocks from more than one exchange.
  • NASDAQ – The NASDAQ index is heavily weighted toward technology and the future of most markets will be dependent on technology companies and the innovations they bring to all of us.  But one must be careful when following the NASDAQ alone because the index is driven by just a handful of large, influential technical stocks.
  • DOW Composite – The Dow Jones Composite Average is a stock market index composed of sixty-five influential companies traded on both the NYSE and NASDAQ exchanges.


We chose these six because they are easily defined, and apart from the M2 Money Supply, the definitions have remained constant for decades.  With the stock market measures, the definition is constant even though the individual stocks that make up the average do change with the times.


Now that we have our six measures how do we apply them?  There are many opinions, and counter-opinions about the validity of any measure produced on television.  The financial channels make a lot of money pontificating about markets, how to measure them, how to factor in inflation, politics, the FED, and a host of other variables.

“People who pride themselves on their ‘complexity’ and deride others for being ‘simplistic’ should realize that the truth is often not very complicated.  What gets complex is evading the truth.”

Thomas Sowell

Our method is simple, and we believe removes much of the noise from the discussion.  Each of these six is measured against itself, as reported, and not adjusted for anything.  If regulatory or inflationary pressures have been involved in the change of the index, then it is reflected in the resulting number.  In this way we are sidelining those distractions and only looking at raw data.  Pundits, economists, politicians, and analysts always have the “but” or “however” reason while the number you see needs revision.  We would contend that for every argument there is a counterargument, and the cycle is never ending once you start down the revisionary path.

Let us assume on the longest index (2000 to 2023) that the NASDAQ starts at 1,000 on December 31, 2000, and at the end of year 2010 it stands at 1,500, and at the end of 2020 it stands at 1,750.  Graphically the chart would be represented by the values 1.00, 1.50, and 1.75.  The NASDAQ in this example has been measured against itself and not clouded by noise from other economic and political influences.

The NASDAQ is measured in points on a scale not dollars so comparing it to the M2 Money Supply would be difficult with other processes.  But using this same method we can create points on a graph merely by dividing subsequent values by the starting value.

In all cases we have created an index where we could ask the question: “If I had a dollar in 2020 and I invested it in the NASDAQ as a whole what would that dollar be worth today?”  or “For every $1.00 in circulation in 2000 there are now $X.XX dollars in circulation now.” or “For every $1.00 we had in national debt in 2010, there are now $X.XX in debt today.”

In our next installment we will present the actual data for you to consider!  There are surprises!  We also expect periodic updates to this set of numbers when there is something worth discussing, not on a set schedule.

DISCLOSURE: This commentary is being communicated as general information and observations only and should not be taken as investment advice.  It is not investment research or a research recommendation, as it does not constitute material research or analysis.  The actions that you take as a result of information contained in this document are ultimately your responsibility.