Risks, rewards, and significance of gold over a century
The price of gold is approaching $3,000 per ounce in 2025, influenced by concerns regarding decelerating economic growth in the U.S., escalating geopolitical tensions, and increasing fiscal deficits. The recent increase has aligned with a downturn in equity markets, rekindling interest in gold as a means of portfolio diversification. However, prior to hastily incorporating gold into your investment portfolio, it is prudent to take a moment to analyze its historical context, associated risks, and its function in long-term investment strategies.
An Examination of Gold’s Performance Over the Past Century
The ascent of gold from $20.68 per ounce in 1920 to an anticipated near $3,000 in 2025 exemplifies a significant economic phenomenon. Presented below is a detailed analysis of performance metrics:
– Initial Price (1920): $20.68
– Present Price (2025): $2,983.65
– Overall Return: +14,328%
Notable fluctuations in prices commenced post-1971, coinciding with the United States’ departure from the gold standard. Since that time, gold has achieved a noteworthy annualized return of 8.42% when measured in USD. Nonetheless, as illustrated by the chart, this trajectory has been characterized by significant volatility, featuring both pronounced upswings and prolonged downturns.
The Adverse Aspects: Declines and Fluctuations
The fluctuations in gold prices underscore the asset’s intrinsic volatility. Although it functions as a safeguard in times of crisis, it is by no means devoid of risk: The most protracted bear market occurred between 1980 and 2000, during which gold experienced a depreciation of 61.3% over a span of 20.5 years. Additional drawdowns of -36.9% over a period of 1.5 years and -40.1% over six years underscore its vulnerability to significant market corrections.
In contrast to equities, which typically demonstrate recovery within a timeframe of years, the recovery periods for gold can extend over several decades. The protracted timeline presents difficulties for investors with a short-term focus.
Decadal Returns: The Rollercoaster Ride The decadal returns of gold exemplify significant volatility:
Consider the implications of making allocation decisions influenced by recency bias. In the early 1980s, investors, buoyed by the remarkable returns of the 1970s, which totaled an impressive +1359%, encountered a subsequent two decades characterized by negative returns.
In the early 2000s, investors who overlooked gold during the lackluster performance of the 1980s and 1990s would have missed out on its substantial rally in the 2000s, which saw an increase of 293%. This unpredictability highlights the necessity of systematically rebalancing portfolios.
The Continued Significance of Gold: An Examination of the Lindy Effect
Gold, with a historical legacy spanning over 5,000 years, serves as a quintessential illustration of the Lindy Effect, positing that the duration of existence correlates with the likelihood of continued survival. Gold has maintained its function as a store of value through periods of conflict, economic downturns, and significant technological advancements. Although it does not produce cash flows akin to equities or bonds, complicating its valuation, its robustness positions it as a dependable safeguard against systemic risks.
The Rationale for Including Gold in an Investment Portfolio
The low correlation of gold with equities presents substantial advantages for diversification.
Risk Management: Incorporating a modest allocation of gold can mitigate portfolio volatility.
Systematic Rebalancing: The process of rebalancing between equities and gold enables investors to strategically divest from high-performing assets in order to acquire those that are underperforming. Gold often exhibits strong performance in times of market downturns or periods characterized by uncertainty.
Portfolios that allocate merely 5–10% to gold frequently demonstrate superior risk-adjusted returns compared to those consisting solely of equities.
An equal allocation between gold and the Dow ETF, with annual rebalancing, has yielded superior returns compared to individual investments in either asset over the last twenty years. This unexpected outcome illustrates the Lindy Effect at play, indicating that systems and strategies that persist over time are likely to grow more resilient and have a higher probability of future success.
