Thursday , 23 May 2024

Gold Is A Risky Investment – Here’s Why

We have to be very careful with past performance.  It’s nice to have a historicalgold-truth record of how certain asset classes have performed in the past, but it’s always dangerous to assume that the future will necessarily look like the past…That said, we do have some evidence to work with and it would be equally naive to totally ignore past performance so let’s actually put these historical figures in some perspective.

The above introductory comments are edited excerpts from an article* by Cullen Roche ( entitled Putting the Performance of Gold in Perspective.

Roche goes on to say in further edited excerpts:

The price of gold was fixed before 1971 so we don’t have as much history as we might like, however, we can still make some sound conclusions based on this time period.  As such, let’s compare gold with a standard 60/40 stock/bond portfolio and a bond aggregate.  The results are pretty clear [as illustrated in the chart below]:

  • The 60/40 portfolio has outperformed the other two portfolios in nominal returns.
  • The bond portfolio has the most consistent risk adjusted returns….
  • Gold 
    • has been an atrocious risk adjusted performer generating a compound annual growth rate that is the equivalent of the bond portfolio, but does so with over 4X the volatility!  Even a pure stock portfolio had a standard deviation that was 40% lower over the same period…
    • has provided some non-correlation to other asset classes which creates increased diversification and could boost the risk-adjusted returns of a broader portfolio by having this slice of non-correlation included…
    • has performed fine in nominal terms since the price fix was removed but it has not been remotely stable.  In fact, it has been so volatile that its risk adjusted returns are among the worst of all available asset classes over this period.

portfolio growth


The past is not prologue and my rationale for disliking gold as a substantial holding in any portfolio [I Don’t Mean to Rant Against Gold BUT] has nothing to do with past performance, but rests in what I believe is the risk of a collapsing “faith put”.  That is, there is a price premium in gold due to its perception as a currency.  I personally believe this perception is flawed and I think technology will render it entirely false as time goes on.

The future of money is not in rocks, but in spreadsheets on computers.  Therefore, it’s my opinion that this “faith put” will slowly be removed over time as this added demand for gold disappears and this is why the past data is even more dangerous than many people think.

If I am right about my views going forward then gold isn’t just risky based on past performance, but it could be even riskier in the future as the “faith put” subsides and the myth that “gold is money” disappears.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

* (Copyright © 2014 All Rights Reserved; Subscribe to Pragmatic Capitalism)

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