Gold versus stocks: where should I invest?

Gold is still a vital part of the global economy, even though it no longer backs the US dollar (or any other currency). For example, several central banks around the world and international organizations such as the International Monetary Fund hold gold reserves on their balance sheets. Most experts advise that individual investors should keep gold in their portfolio as a means to diversify their investments and also as a safe haven. Retail investors have a wide range of options to invest in gold, including purchasing physical gold in the form of gold bars (also known as bullion), buying into gold ETFs and mutual funds, as well as purchasing shares of gold mining companies, to name but a few. Like all investments, gold comes with a host of risks and costs, so the timing of your purchases of gold-based assets and the type of instrument you choose are vital to securing returns.

Buying stocks is undoubtedly one of the most popular ways of investment worldwide. For many people, it is synonymous with growth investment. The case for stocks is a solid one: if you choose your investment wisely, stocks can yield spectacular returns, with some of them also paying dividends.

The arguments in favor of both forms of investment are numerous. 

Stock investments can produce regular income and grow in value depending on the business performance of the specific company. Many stocks pay dividends; and even companies that don’t pay dividends often reinvest their profits to ensure that their business grows, thus generating additional returns for shareholders down the road.

Gold has also many arguments going for it. It often functions as a hedge against stock holdings and has a tendency to perform well in times of global upheaval or a worldwide economic downturn. Because both the stock and gold markets are subject to high volatility, there can be periods when gold outperforms stocks, sometimes significantly. For instance, the global Covid-19 outbreak and the resulting economic uncertainty have led to a rally in gold prices. Nevertheless, gold can be an imperfect hedge against stocks, as evidenced by the Covid crash of 2020 when gold also fell initially as market participants had to liquidate their gold positions at any price to cover losses elsewhere.

Unless you have specific reasons for not investing in one or the other, the most sensible solution is to include both gold and stocks in your portfolio and re-balance them from time to time (i.e. sell one asset high and buy the other low). Over the very long run, it is expected that a broadly-diversified portfolio of quality stocks (not randomly selected penny stocks) will outperform gold if you do buy and hold both (see chart below). Note, however, that no investment is bulletproof. As gold’s performance is tied to real interest rates, there will be times when both the stock market and gold prices will suffer; for example at times of rising real interest rates that are not underpinned by high growth in the economy.