Are gold and silver suitable retirement investments?
That is the question that we're going to be answering in this article today. And this is undoubtedly a question that is near and dear to my heart and has been since the time I was a boy.
My dad started his career in real estate, which of course, is a tangible asset. In 1988, he purchased part of a precious metals company, and that started his career in selling and brokering gold, silver, and platinum. Primarily, he sold gold as an investment, but he also sold silver and platinum. In 1988, when I was 14 years old, I began to understand fiat currency, money printing, and our federal debt. At that time, the US dollar had only been off the gold standard for about 17 years, came off the gold standard in 1971.
So here we are now celebrating the 50th anniversary of when our US dollar came off the gold standard in August 1971. What has happened to the dollar, and what has happened to gold since that time?
One of the things that jump out to me is that when our currency came off the gold standard, we have had a lack of discipline in the amount of debt we have taken on as a government. Back in 1971, our federal government debt load was about half of the size of the economy.
Now, the US debt load today here in 2021 stands at 28 trillion or 130% of the size of our economy.
That is a tremendous increase in the amount of debt that we've had. When gold came off of the standard, of course in 1971, it has done an incredible amount of growth since then. Today gold is one of the most traded investments in the world with daily volume around $145 Billion, which is only surpassed by the S&P 500 and US Treasuries...but not by much.
Over the past 50 years, gold has expanded more than 46 times with a compound annual growth rate of about 8%. If you look at gold from May 1975 to May 2021 (46 years), gold has a return compound annual growth rate of about 5.37%, about 5.37%. If you look at the S&P 500 during that same time - well, close to it. From January 1975 to December 31st of 2020 (45 years), the S&P average about 9.25% per year.
As for silver, since we're also talking about that precious metal, if you look at silver from February 1915, when it was 51 cents, to February 2021, when it had grown to $27, silver has a return during those 106 years of 3.83% a year.
So it's apparent that the US stock market, on average, has had a higher long-term return than both gold or silver. So we go back to our question: Are gold and silver a good retirement investment?
I think to answer this question, we have to understand what makes a good investment.
A good investment is something that you're going to put your money into, and you're going to get a return on it.
If we remember the lesson that God was teaching us in the New Testament, where he's talking about the Parable of the Talents, where he gave one talent to one of his stewards and then three talents and then five talents to another steward. And the one that had one talent went and hid it in the ground. And the one that had five talents took it and went and made five more. Immediately went and took it and made five more. In some translations, the word trader is used, or trading is used for the one with the five talents. Gold and silver are much better than taking it and burying it in the ground and does offer its investor tremendous inflation protection over time. For silver to go from 51 cents to $27 is fantastic over 106 years. And so, all of these investments will offer you inflation protection.
A bad investment is one that you have to pay interest on. A bad investment is a depreciating asset. For example, a car, or a personal use item, clothing, furniture. Anything like that is going to be a bad investment. When you buy something and know it's going to go down, it's a bad investment. Often when you buy something with debt, it can be a bad investment. There are all types of bad investments. Bad investments are investments where you're guaranteed a super high return that seems too good to be true, and it ends up being a Ponzi Scheme or some other type of corrupt Lee-run investment.
The other question we need to ask is: are we following the other great rule of investing, the rule of diversification.
I've quoted it before, and I'll quote it again, King Solomon, one of the wealthiest men that's ever lived, and one man that was reported to ask God for wisdom. It was told and written that God did give him wisdom. He wrote thousands of years ago that we want to "diversify our wealth seven or eight ways because we don't know what danger is going to fall upon the earth.” And that's from Ecclesiastes 11:2. So one of the things we want to look at is gold and silver for diversification. If you look at the correlation between gold and silver, I think it tells an excellent story for us. Gold does not correlate with the US stock market over from January '07 to May 2021. Silver has a low correlation of about 0.27 to the S&P 500 or the total US stock market. The correlation of silver to the bond market is the same, 0.26 to low correlation for gold and a moderate correlation to the bond market since January 2007.
So as we look at whether gold and silver provide us with proper asset class diversification or low to no correlation to US stocks and US bonds, which are both large markets, I think we have to say that, yes, they certainly do.
With silver being a low correlation and for US stocks and for gold being no correlation to US stocks. But then we want to look at how it impacts performance, and I think this is one of the most telling things that we can look at. It's essential to understand how diversification works and what its big selling points are. And so, as we look at that, we want to look at just a portfolio of stocks and gold, US stocks and gold.
As we look at stocks since January 1972, from May 2021, stocks had a compound annual growth rate of about 10.81% a year. During that same period, gold had a compound annual growth rate of about 7.79%. So clearly, US stocks average 3% higher per year. From January 1972 to May 2021, gold did not correlate to US stocks as far as how they performed. So, in other words, if US stocks went up 1% on a given day, we have no idea what gold could have done. It could have gone up 1%, 2%, 3%. It could have gone down 1%, 2%, 3%. It could have stayed flat at 0%. We just don't know. It just doesn't have any correlation to US stocks. A negative correlation means it would've gone down when the US stock market goes up. A positive correlation means it would have been more likely to go up when the US stock market went up.
The fascinating thing about diversification is as we look at a 50% blend, 50% gold, 50% total US stock market from January 1972 to May 2021, a portfolio consisting of that would have had a return of 10.54% per year. So even though it would have had 50% gold, the portfolio's return is almost the same as US stock during that time, which was 10.81%. It's very close. The reason why is because when you have proper diversification, you avoid the significant drawdowns, and the big drawdowns are what impact and damage long-term returns more than anything else. That's why diversification is so important. The max drawdown for a 50/50 blend of gold and the total US stock market during that time period, which would have been about 49 years, was 33.29%. But the most significant drawdown for the total US stock market was 51%, and for gold, it was 62%. So, that begins to show you the benefits of having gold in your portfolio.
If you look at the rolling returns of a portfolio of both gold and silver, its worst three-year return would have been -4.27%. Its worst five-year return would have been breakeven. When you compare that to the worst five-year return for gold would have been -14%, and the worst five-year rolling return for the stock market would have been -6.23% per year.
Certainly, when you [inaudible 00:13:54] portfolio again, you literally have not one losing five-year period since January 1972, when you have a 50/50 split of gold and the total US stock market. That is extremely important. When you can put your money into an investment and be confident that you're not going to lose your money in any given five-year time period, that's very important.
- The stock market was breakeven for 25 years, from 1929 to 1954.
- The US stock market was breakeven from 1966 to 1982.
- The US stock market was breakeven from 2000 until 2013.
That's a lot of years, and most people don't want just to put their money into one single investment and hope that they're not getting into a period where they're going to be breakeven for 13 to 25 years.
So diversification is enormous. It allows me and you to put our money into investments where our time period for worst-case scenario break evens are reduced by 50 to 75%. When you can put your money into something and know that in a worst-case scenario, you're going to have your money back in five years and that it also has a 10% per year long-term rate of return, that can make an investor feel confident and feel good. That's why diversification is so important. That's why King Solomon told us to do that. He knew that we were emotional creatures. He knew that we lived short lives. And at the time that he said that, people weren't living nearly as long as they do today. So when he said it, being breakeven for 13 to 25 years would have been a no-go. It would have been very unwise to do that. So clearly, as we look at both gold and silver, and I know we've talked more about gold, we can see that they pass the litmus test.
Gold and silver have provided investors with excellent inflation protection: silver to the tune of 3.8%, and gold around 5 to 8%, depending on the time period that you take. We'll just call gold 7% per year.
Also, gold and silver provide us with diversification and non-correlation or low correlation to the US stock market and the US bond market, which passes the second test of whether or not something is a good investment.
So that was a very long answer to a question, but I wanted to make sure we looked into it thoroughly before we just tried to answer it. And the answer is a resounding yes! Gold and silver are both phenomenal investments for you and me in retirement and at any other time because they provide a return on our money and true asset class diversification.
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