The Investment Scientist

Historical Performance of Stocks and Gold vs. Inflation

Posted on: March 20, 2022

In the face of rising uncertainties and the prospect of persistent inflation, today I investigated the historical performance of stocks and gold relative to inflation. Here is what I found:

Note that green denotes outperformance over inflation and red denotes underperformance. Here are my observations.

1) Out of the nine ten-year periods, stocks outperformed seven times and underperformed twice. 

2) The two times when stocks underperformed, gold had massively outperformed! This makes gold a natural hedge to the extent that history might repeat itself. 

3) One of the periods (E) of stock underperformance was the decade of hyperinflation in the 1970s. The other period (B) was the decade when the US was hit by two financial crises: the dotcom bubble burst and the housing market collapse. With the way things are going now, we can’t rule out either of the two happenings again. 

4) The return on gold is extremely erratic. Of the last five decades, two have shown massive returns, the other three have shown either anemic or even negative returns. Holding gold is not for the faint of heart.

Based on these return characteristics, I believe one should allocate up to 3% of their portfolio to gold. What do you think?

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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