An Investment In Gold Is Not As Glittering As You Might Think

gold_bar Last week, my Foolish colleague David Kuo wrote about why he’s a fan of shares, and not gold. That got me thinking about how gold actually fared in Singapore dollars as opposed to the Straits Times Index (SGX: ^STI), a proxy for how much our overall stock market has grown.

There have been many studies done on the returns of gold compared to the US stock market, with the latter proving to be the superior investment over the long-run (for a sample, see here and here). However, I’ve not come across any similar studies for the Singapore market which prompted me to look back at history to see what it can teach us.

But before I do so, I already had a sneaking suspicion that the shiny yellow metal probably wouldn’t amount to much of an investment compared to shares. After all, I very much agree with David on the lack of any investing-related merits for gold.

Good businesses can enrich shareholders by providing more valuable goods and services to customers over the years and rake in the profits and cash flows that will eventually accrue to shareholders.

Gold, on the other hand, just… sits there in a vault or someone’s favourite drawer, looking pretty and not producing anything meaningful besides pandering to someone’s lust for lustre.

Going back to the historical performance of gold, I collected historical data on the STI from Yahoo Finance stretching back to the start of 1988 (data about the STI from Yahoo Finance only goes back to 1988, and 25 years would also be a reasonable timeframe for an individual to partake in investing activities before he/she needs to draw down his investment funds for use).

Meanwhile, I obtained historical gold prices (denominated in US dollars) from the World Gold Council and converted the US-dollar-denominated gold prices into Singapore dollars using historical exchange rate data provided by the Monetary Authority of Singapore.

For those wondering why I had to go through the trouble of explaining my data collection steps, it was because I recognise the fact that actual Singapore-dollar-denominated gold prices might differ from my calculations due to the roundabout way I obtained my data.

But, there was a lack of easily-obtainable gold-price data in our local currency which necessitated the need for me to make my own calculations and use that as a reasonably close proxy for the actual prices of gold in Singapore dollars.

In any case, the chart below shows my handiwork after spending a nice weekend crunching the numbers (What? You mean spreadsheets don’t excite you?).

gold not as glittering

Source: Yahoo Finance (for STI’s data); World Gold Council (for gold prices; the site requires an account for access); and Monetary Authority of Singapore (for exchange rate data)

A hypothetical investment of $1,000 into gold at the start of 1988 would be worth close to $1,800 now, giving a compounded annualised return of around 2.4%. On the other hand, the same investment into the STI would have appreciated by a compounded annual rate of slightly more than 5% and would be worth $3,500 now (almost double the returns of gold!).

To tilt the investment-return-balance even more in favour of the STI, I have to point out that the index’s returns did not factor in dividends. If dividends were added to the mix, the STI’s compounded annual rate of return could reasonably be boosted by two to three percentage points (for instance, the dividend yield of the STI-tracker, SPDR STI ETF (SGX: ES3) stands at 2.7% as of 23 August 2013) to at least 7%.

And for clarity’s sake, at a 7% annual rate of return, the STI would have turned $1,000 at the start of 1988 into $5,400. The difference between gold’s estimated return after 25 years and the STI’s growth is not trivial!

So it seems even in our local context, gold has had less glitter than stocks. That said, it would be folly to expect stocks to outperform gold all the time.

It’s only fair for the relative performance between different investable asset-classes (though I’ll certainly hesitate to even call gold an investable asset-class… but that’s another story for another day) to wax and wane over short periods of time but yet also produce clear winners if we stretch out the investing time horizon.

Also, it pays to note that stocks’ historical performance is no guarantee that it will definitely outperform gold going forward. Nothing is certain in this world. But, investing, at its core, is a game of chance where investors have the ability to stack the odds heavily in their favour. Because of that, we have to look back at history to see what it can teach us.

And from what I’ve seen so far in history, an investment in gold is not as glittering as you might expect.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.