The Magnitude Of Long Term Profits In A Gold Secular Cycle

The advantage to being in stocks would be to have more than 6X the net worth over ten years, relative to being invested in gold.

Someone who started with $500,000 in 1980 would have had $170,000 in inflation-adjusted terms by 1995 if they had been entirely invested in gold but would have had $1,235,000 in inflation-adjusted net worth (on a price only basis) if they had been invested in the S&P 500 over the fifteen years. The magnitude of that real world, real history 728% net worth advantage could have had truly life-changing implications when it comes to financial security, the ability to retire, and the standard of living in retirement. It is also vital to keep in mind that this is in inflation-adjusted terms, if we look at in just simple dollar terms, the stock investor would have turned $500,000 into $2.3 million (before dividends), while the gold investor would seen their value fall to $314,000.

Over the following five years, stocks would enter bubble territory, creating a long string of consistent two-year rolling advantages and a new generation of day traders, even while gold continued its two-decade slide. So that by the year 2000, the final year of the secular cycle, the magnitude of the cumulative advantage to stocks over gold was an astounding 26 to 1 increase in relative net worth.

The 2000 To 2012 Cycle: Gold Over Stocks

Then the secular cycles flipped again, with the collapse of the tech-stock bubble and the resulting recession.

Memory and belief systems are an interesting thing. Ask many investors, and they would likely say that gold took off in the financial crisis of 2008, but then peaked and began falling in 2012 when as it turns out, the world didn't end after all. There is some truth to that - but not the whole truth, indeed the actual historical record was quite different.

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As can be seen in rolling two-year advantage graph above, almost the entire area of the graph between 2000 and 2012 is yellow - with each one of the those data points being a separate, consistent two year advantage to investing in gold over stocks.

It wasn't just the collapse of the tech-stock bubble. It wasn't just the collapse of the real estate bubble or the financial crisis of 2008. On a highly consistent basis, right through the early and mid-2000s, gold just kept climbing, and climbing, and climbing, right through the growth of the real estate bubble. This was also a time when the S&P 500 fully recovered on a nominal (not adjusted for inflation) basis, with an annual average index price of 1477 in 2007, which exceeded the prior average annual high of 1427 set in 2000.

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Again, the remarkable consistency of the contracyclical relationship between gold and stocks over the secular cycles can be seen in the graph above. We have another inversion, and for every year from 2002 onwards it is the yellow bars of gold that are experiencing inflation-adjusted gains that exceeded the rate of inflation on a cumulative basis by a greater margin each year. So the value of gold in cumulative and inflation-adjusted terms rose 40% from 2000 to 2005, then 85% from 2000 to 2006, then 107% from 2000 to 2007, and so forth.

Stock prices meanwhile were consistently negative in every single year in inflation-adjusted terms (relative to 2000), meaning that stocks were consistently failing as inflation-hedge, even as gold was exceeding the requirements for an inflation hedge by ever greater margins each year.

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When we take the consistency of the two-year advantages and let them build on top of each other over time, then we get the magnitudes shown in the graph above. An investor in gold would have had almost twice the net worth compared to an investor in stocks after just the first three years.

When we look at 2007 - before the financial crisis and during the year the S&P 500 set all-new nominal average annual highs - the cumulative magnitude of the advantage to gold prices over stock prices was still up to almost 2.5 to 1.

By 2009 the financial crisis had occurred, and an investor who started with $500,000 in the year 2000 would have had $1.4 million in inflation-adjusted wealth if they had invested in gold, but if they had invested in stocks instead then their inflation-adjusted net worth would have been down to $265,000. This 5.3 to 1 net worth advantage to gold over stock prices could again have made a life-changing difference to an investor when it comes to financial security, or the ability to retire, or the standard of living in retirement.

Yes, that 5.3 to 1 advantage occurred in the year of the depths for the U.S. economy and stock market - but on a relative basis, gold would still consistently outperform stocks for the next three years, using the rolling two-year comparison basis. And those consistent advantages, building on the base of the 5.3 to 1 advantage in 2009, would lead to a 5.5X advantage for 2010, a 6.3X advantage for 2011, and a 6.2X advantage for the full 12 years of the secular cycle.

The 2012 To 2019 Cycle: Stocks Over Gold

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When the secular cycles flipped again in 2012 - we see another inversion and another demonstration of the contracyclical relationship between gold and stocks. The green bars flip to all positive, and the yellow bars flip to all negative

It is now the green of the S&P 500 that has a remarkable consistency - with prices equal to or higher than the previous year, without exception. Keep in mind - a 0% change in inflation-adjusted price means a perfectly successful inflation hedge, one that exactly maintaining purchasing power. Stocks not only exceeded that requirement in every year, but they did so in a manner such that investors steadily built ever greater amounts of wealth in excess of the rate of inflation in each year.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a ...

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