The S&P 500 has been in one of the strongest bull markets in history since 2009. Yet surprisingly, in the past decade, the SPDR Gold Trust (ETF) (NYSEARCA:GLD) has actually outperformed the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) by more than 15 percentage points (even including the SPY’s dividends). The GLD is up nearly 120% since 2006.
That didn’t come in a straight line, of course. That covers a major run-up all the way through 2011, the declines of the next five years and gold’s rebound in 2016.
More importantly to new money: Many of the reasons the GLD has outperformed the SPY in the past 10 years could hold true for the next 10 years as well. Here’s a look at 10 reasons gold could prove to be a better 10-year investment than stocks.
- Gold for Diversification: Gold’s 12-month correlation to the S&P 500 in the past 45 years is exactly zero. Therefore, for investors looking to diversify their portfolios, owning gold (via the GLD or otherwise) is an easy way to reduce overall risk. Investors will continue to buy gold to diversify their portfolios in the next 10 years.
- Rising Debt Levels: Global debt levels have been skyrocketing as a number of central banks try to spend their way out of slowing economic growth. When countries print money, and debt starts piling up, investors get nervous and turn to gold. It’s unlikely that global debt levels will start declining in the next 10 years.
- Growing Gold Demand: Like any other free market, gold prices are determined by supply and demand. Growing gold demand from China and other emerging-market economies is showing no signs of slowing down. Last year, Chinese investors bought 985.9 metric tons of gold, up 3.7% from 2014.
- Inflation Hedge: Gold prices tend to rise as the cost of living rises, which makes the precious metal a great hedge against inflation. Historically, gold and U.S. Treasuries have been the most popular inflation hedges. Unfortunately, 10-year Treasury yields recently hit all-time lows following the Brexit vote and remain severely depressed.
- Negative Interest Rates: Speaking of Treasuries, even investors that normally wouldn’t consider the GLD are compelled to buy it these days because it’s extremely difficult in the low-rate environment to generate any significant returns from bond yields. As of the end of June, Fitch Ratings reported that $11.7 trillion of global debt is now in negative yield territory.
- Flight to Safety: Gold’s perception as a safe haven in times of economic turmoil makes it a top choice for fearful investors. Carl Icahn and George Soros are two of a growing number of famous investors that are predicting a large stock market crash in the near future. If their prediction comes true, even more investors will soon be flocking into gold.
- Stocks Have Limited Upside: Stocks clearly have momentum in the near-term, but the S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) is now sitting above 27. The only other times it was this high in history were just prior to Black Tuesday in 1929, during the dot-com bubble in 2000 and prior to the financial crisis in 2008. It’s hard to see much long-term upside remaining for the stock market.
- The U.S. Dollar May Have Peaked: Despite the fact that the dollar has pulled back a bit in 2016, it remains near its highest level since 2003. If the dollar reverts back near its mean level for the past decade, the GLD will be headed higher.
- Wealth Preservation Investors: Paper currencies come and go, but gold has been used as an actual currency for centuries. Although the metal has little practical use, investors perceive an intrinsic value in gold. It makes them feel safe during times of uncertainty. If you believe global economic uncertainty will be on the rise in the next 10 years, gold could be a solid play.
- Gold as an Insurance Policy: Similar to No. 9, lots of people that are strangers to Wall Street have been scooping up gold in the past decade because they don’t trust the global financial system. Much of these fears stem from the near-catastrophic mortgage crisis back in 2008. The likelihood that fears of another major systemic crisis will pop up at some point in the next decade seems high.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
