11 May 2010

Gold Hits All Time High

Gold 6 Comments

I was listening to Dave Ramsey–whom I love now, by the way, despite his views on whole life–and he was pooh-poohing gold. He said something like, “I look at an investment based on its track record, not on ‘feelings.’ And if you throw out the last 7 seven years, gold has performed just horribly.”

Now Dave’s recommended strategy is to put your money in a mutual fund. Does anyone know how many years back we would need to go, in order for a mutual fund to have outperformed gold as of today? It’s a lot more than 7 years.

6 Responses to “Gold Hits All Time High”

  1. Silas Barta says:

    LOL Good catch.

    Note for readers: when Bob refers to Ramsey’s views on “whole life”, he’s referring to “mutual whole life insurance”, a legal tax shelter in which your savings can get competitive dividends, and also referred to as “infinite banking” [1]. He’s not referring to Ramsey’s views on “the entirety of life” or anything like that.

    Btw, were you being sarcastic about liking Ramsey? You disagree with him about whole life insurance, and he made a ridiculous remark about gold, so … is there are redeeming quality or what? The tithing thing, is it the tithing thing? (Tongue twister!)

    [1] and which I really want to know more about but can’t find much information online in terms of specifics in getting one started.

    • bobmurphy says:

      Ah good clarification Silas. But no, I wasn’t kidding, I am hooked on his show right now. He tells people to “act your wage” and people do a “no debt” scream and he plays a Braveheart clip. It’s good stuff.

  2. Taylor says:


    Unless Ramsey is speaking of a mutual fund purchasing shares of gold miners. Then he might have gotchya’d you

  3. Lucas M. Engelhardt says:

    I’m also a Ramsey fan. He does good work encouraging people to start living within their means and get out of debt. He’s also great fun to watch/listen to.

    Anyway, in answer to the question…

    I just looked at average gold prices from Kitco, and looked at January prices for the S&P to come up with a comparison. I assumed that you bought in some starting year, and held until recently (I used January for the S&P price). Since the dates are fuzzy, this isn’t 100% precise, but should give an idea. I only used data from 1972 on.

    Here’s how it breaks down.

    If you bought in 1972-1973 or 1992-2008 , gold outperforms the S&P 500.
    If you bought in 1974-1991 or in 2009, the S&P 500 outperforms gold.

    So, for 38 different starting years, gold “wins” in 19 of them – the S&P in the other 19.

    But, this doesn’t include dividends at all.

    One point I found interesting: if you look at annual “January-to-January” returns, the average for this period is:
    S&P: 7.8% (remember, no dividends)
    Gold: 10.7%

    The standard deviations are:
    S&P: 17.3%
    Gold: 26.3%

    So, gold provides a better return – as long as the S&P’s annual dividends average less than 2.9%, and I’m not sure if they do or not. I think they’ve been right around 2% recently. At the same time, gold is significantly more volatile.

    Which is why I didn’t feel a need to say anything defending gold when I attended Ramsey’s “Financial Peace University” at my church. I happen to believe that gold isn’t a terrible investment – but I’m also not convinced that the average Joe should be heavily invested in it. (Note: I don’t actually own any gold… I do, however, have some holdings of silver.)

    • bobmurphy says:

      Thanks. And right, I knew about the issue of dividends, which is why I didn’t just look at the S&P myself. But your work is interesting.

      Also, I’m not saying someone should always buy gold as an investment. But when Nixon first went off the gold standard, and the goldbugs said, “Holy cow buy gold!!” they were right.

      And thus far, when Bernanke shot the moon and I said, “Holy cow buy gold!!” I have also been right. (At least in an absolute sense; the S&P may have outperformed gold from the point at which I started this blog, I don’t know. Actually I don’t think so, but it’s possible.)

      Finally, the point of my original post here: Ramsey made it sound as if gold has been a fluke just in the last 7 years, but then he also has to explain the “fluke” of the stock market being lower now than it was 10 years ago too. So in terms of stock market versus gold, you have to go back pretty far–much more than 7 years–to see Ramsey’s “point.” In fact, if your numbers are right and we (unfairly) disregard dividends, then we have to go back 18 years before the “fluke” of gold stops outperforming the “safe” investment in a diversified basket of stocks.

      I think Ramsey’s listeners would be surprised to learn that when he talks of “track record,” he means something that takes longer than 18 years, and that is subject to the occasional drop of 20% in single day (1987).

      • Lucas M. Engelhardt says:

        Yeah, I think the point is a good one. Of course, if you look in history, there are other even stranger flukes – like the Dow being at the same level in 1955 as it was in 1929.

        But, if you take a different approach – that I think might be what Ramsey means, whether it makes sense or not – you end up with a different result. Here’s what I have in mind: do the same exercise, but have 2003 as your end date. In that case,

        If you bought in 1972-1996, the S&P outperforms gold.
        If you bought in 1997-2002, gold outperforms the S&P.

        This way of performing the exercise makes gold look a bit worse.

        Of course, if you throw out even more of the data you can show that the S&P always outperforms gold… Of course, if you throw out enough of the data, you can show the opposite, too.