Gold or shares: What is the better investment?

One decision that is often discussed is: When should you hold gold and when should you hold shares?

First of all, we would like to take a look at Fig. 1. It shows the relationship between the US Dow Jones Industrial stock market index and the gold price (USD/oz). The time series shows how many shares you can buy for an ounce of gold. If the line takes a high value, gold is “cheap”; if it takes a low value, gold is “expensive”. A closer look at the time series reveals that the equity-gold ratio shows a rising trend: Over the years, stock prices have risen faster than the gold price has risen.


From an economic point of view, this is anything but surprising: shares of companies that operate successfully in the market become more valuable over time. This is reflected in rising share prices. Gold, on the other hand, has no such intrinsic increase in value over time; it is “just” a type of money, and as such it does not compete with shares, but with the other, uncovered types of money. As Fig. 1 shows, the equity-gold ratio has fluctuated enormously during the period under review: In the summer of 1999 it reached a high of almost 43, and in July 1980 it fell to a low of 1.4.

The following can be derived from this: In periods when the equity-gold ratio has risen (these periods are marked grey in Figure 1), holding stocks was more advantageous than holding gold; and in the other periods, the opposite was true: Here, holding gold was more advantageous than holding stocks. For example, from August 1999 to October 2012, it was advisable to bet on gold rather than equities. Since then, the opposite has been true.


Very high return on investment possible through market timing

What can the investor derive from these interrelationships? If the investor has a good sense of market timing, he can achieve a very high return on investment by switching stocks to gold at an early stage and vice versa. Unfortunately, however, very few have mastered market timing. Most investors (and the author of these lines counts himself among them) do not succeed in exchanging shares for gold or gold for shares at exactly the right time. But there are other options for action.

For investors, for example, who operate with a long time horizon and who do not expect crisis events to threaten the system, it would make sense to focus only on equities (“equities only” portfolio) – because their calculation, consistently thought through to the end, means that equities will continue to rise more strongly than the gold price in the long term, as in the past, even if they may be subject to strong price fluctuations in the short term.

For investors who expect a crisis to occur but do not know when it will, it is advisable to hold a portfolio of stocks and gold. If the feared crisis does not occur or only after a very long time, investors sometimes miss out on high price and dividend yields, which they may not be able to catch up on afterwards.

“Only equities” portfolios should outperform “equities and gold” portfolios in the long term


In the long run, the return on an “equity and gold” portfolio is likely to be lower than the return on a “equity only” portfolio if the capital market trend of recent decades continues in the future – i.e. if there are booms and bumps in the future that do not end in a “system collapse”.

If, on the other hand, the investor expects there to be a systemic collapse, there is even a possibility that, if his fear does materialise, he will ultimately achieve a higher return with a “stock and gold” portfolio than with a “stock only” portfolio. The table below summarises these considerations.