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Gold is known as a safe haven: during turbulent times in financial markets, many turn to it. However, there’s a catch: when gold declines or remains inactive, it often stays that way for many years. On the other hand, while stocks can experience severe downturns, they generally recover more quickly. Let’s examine the data and then look at the current situation. Additionally, see: What’s Next After MP Stock’s 5X Surge?
Historical data overview
- In early 1980, gold reached a peak of approximately US$ 850/oz, followed by a lengthy decline, not reaching that price again for many years.
- Likewise, after hitting its high in 2011 (U.S. $1,900/oz), gold traded sideways for most of that decade.
- Conversely, the S&P 500 has long-term average annual returns around 10% (before inflation) over several decades.
- When stocks crash (in 2008, 2020, etc.), the recovery typically occurs within 2-5 years rather than decades.
Gold’s “pause” following peaks is often significantly longer. Thus: gold = suitable for insurance or hedging. Stocks = engine for growth. However, growth carries risk.
Current snapshot
Here’s the recent landscape:
Gold prices have surged nearly 50% in the past year — it has indeed shown strong growth lately. Many familiar factors (geopolitical tensions, low interest rates, inflation concerns) are driving this increase. The S&P 500’s 12-month total return hovers around 16%. Historically, the S&P has averaged 10% (excluding inflation) in the long run. Therefore, stocks are performing reasonably well; not exceptionally, but solidly.
These instances illustrate a common phenomenon: gold often drops when the Fed or broader markets shift unexpectedly—whether due to diminishing inflation fears, rising interest rates, or the unwinding of speculative excesses. We consider resilient demand as one of the elements in our High-Quality portfolio, which has surpassed the S&P 500 and delivered returns exceeding 105% since its inception.
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What’s on the horizon?
In light of the current environment, here are some potential “what-ifs” regarding gold and stocks:
Gold
- With gold already experiencing a significant uptick, the logic of “hedging” is effective: risks are high (geopolitics, inflation, central bank actions), prompting people to purchase gold.
- If real interest rates remain low or negative (meaning inflation is greater than bond yields), gold will have the support to continue its rise.
- However, if the global economy robustly improves, inflation subsides, and yields increase, gold may lose some appeal and could enter another “pause” (i.e., stagnate for years) as investor focus shifts back to growth assets.
- Thus, gold may continue to rise moderately if risks persist — yet it also faces the danger of stagnation once the panic subsides.
Stocks
- The recent 16% return is healthy, but it doesn’t guarantee “smooth sailing indefinitely.” If earnings growth sustains this trend, stocks may rise further.
- Crucial risk: if inflation remains high, central banks will likely respond with higher rates ? borrowing costs will increase ? earnings will be pressured ? stocks may falter.
- Conversely: if inflation is managed effectively, economies will grow, technological innovation continues, and stocks may enjoy a more vigorous rebound (especially following a recent correction).
Should stocks undergo a correction (say 10-20%), history indicates that post-panic, the recovery typically occurs more rapidly compared to gold’s extended dormancy periods.
How should investors approach this?
If you are acquiring gold now, be aware that you are purchasing insurance. If conditions worsen, you’ll feel reassured. However, if conditions improve, you might end up with a meager (or flat) return for several years.
If you invest in stocks, you are pursuing growth. You accept the associated crash risks, but historically, the recovery happens more swiftly.
A balanced strategy: perhaps allocate some resources to both — gold for “just-in-case,” stocks for “let’s grow.”
Conclusion
In summary: gold is currently performing well (showing a strong rally), while stocks are performing satisfactorily. Nonetheless, the key theme persists: when gold declines, it can remain neutral for many years; stocks may crash, yet often recover more swiftly. The next few years will be heavily influenced by inflation, interest rates, global growth, and investor sentiment.
If you seek upside potential with a smoother trajectory than an individual stock, consider the High Quality portfolio, which has outperformed the S&P and recorded over 105% returns since its inception.