All that glitters isn’t gold when it comes to investing in the precious metal

Quick quiz: What has lower returns than stocks or bonds but whips investors around more than either? Answer: Gold, that glittery metal approaching record highs, drawing headlines and forecasts projecting higher highs.

However, succeeding in gold takes impeccable market timing or long-term pain. If you cannot time stocks, do not try gold. Gold’s appeal parallels its 10.4 per cent rise through early April, bringing it back over $2,000 an ounce. With last month’s bank failures, last year’s equity bear market and hot inflation scaring us, many see the legendary “safe haven” as an alluring hedge against those threats.

But before buying gold, you need to understand it and how it behaves. It has no earnings, adaptability or dividends. Since 1974, when the gold standard finally ended, it annualised 5 per cent gains. Sound good? Certificate of Deposits and Treasury bills pay that now.

Long-term US Treasury bonds annualised 6.7 per cent over that span. America’s S&P 500 Index doubled that, annualising 11.9 per cent. Those lower returns make sense if it had low volatility. Gold does not.

Consider one-year standard deviations for the three asset classes mentioned, a measure of yearly returns volatility around their averages. Bonds’ standard deviation, at 8.3 per cent, is low. You expect stocks’ famously volatile standard deviation at 15.2 per cent. But gold’s is shockingly the highest at 18.6 per cent. More volatility. Much lower return. Low returns with high volatility pinpoints a stark truth: To shine in gold, market timing is a must.

Gold’s gains can come big – but sporadically, with long stagnations and declines between. The recent pop above $2,000 illustrates this. Now closing in on its $2,063.40 August 2020 peak, gold is only now, 32 months later, nearing flat. In parallel, US stocks rose by 28 per cent – despite last year’s bear market. World stocks climbed 23 per cent.

Consider several darker realities: After a late 1970s boom, gold peaked at $850 in January 1980. It hit that again in January 2008, 28 years later. But first, it dropped 56 per cent over two years, gained 50 per cent in 18 months, fell 35 per cent in three years, rose 55 per cent over four years and fell steadily over the next eight years to 2001 – down another 46 per cent. The next boom pushed gold to a record high of $1,895 in 2011.

Consensus presumed even more gains ahead, especially with eurozone sovereign debt and banking fear exploding while equity markets endured a deep correction. But no. Gold dropped 44.6 per cent through to 2015’s low, not regaining the $1,895 level until 2020.

If you can time that volatility, you surely need no advice from me. If you think you can, you are fooling yourself. Most investors buy gold high and much later, as frustration sets in, sell it low. It is timing or long-term low returns with wild volatility. Gold climbed in only 57 per cent of rolling 12-month periods since 1974. Stocks? 81 per cent. Even if you can’t time stocks well, they work in your favour in the longer term. For gold, it is similar to a coin flip.

Gold’s price swings increasingly come from changes in investor demand from exchange-traded funds. In my 51 years of managing money, I have seen no one with any reliable history timing sentiment swings … in anything. If gold suddenly has your eye, ask yourself why. But last year disproves that. While stocks fell and inflation rose, gold peaked after the war in Ukraine began, then fell, bottoming shortly after stocks did – 5 per cent less but directionally the same.

Gold’s recent climb parallels the 15 per cent-plus rise. That is not what good hedges do. And no sane person buys gold to move largely parallel to stocks.

Finally, rethink gold’s long profitless periods. Inflation was not zero in any of them. Hence, gold lost purchasing power to inflation each time. If you can time gold, more power to you. But for most investors, stocks and bonds are simply better.