by Michael J. Kosares March 2015
"What's past is prologue." – William Shakespeare, The Tempest
A general malaise grips the world economy. Investors today accumulate gold as a defense against some future Black Monday on Wall Street, a general bank or currency collapse, a 1930s-style economic depression, or a sudden and virulent inflation – the very same threats investors hedged with their gold purchases from 2001 forward. The charts you are about to review encompass that past, but in a certain sense, they might also project the future. Why? Simply because the concerns just listed have not been effectively addressed. The outcome remains uncertain, and as long as that is the case, gold will remain under accumulation and the fundamental impetus to its 21st century secular bull market will remain intact.
Chart 1 - Gold annual rate of return since 2001
Chart 1 captures with a great deal of clarity and simplicity gold's performance over the past fourteen years. An investment of $100,000 made in 2001 would have a market value today just under $440,000 even when the market correction of the past two years is taken into account. The average annual percentage return over the period was just over 30%.
Chart 2 is a magnification of Chart 1. It shows gold's gains monthly over the same month in the previous year. Its most telling features are the spikes running concurrent to times of economic and financial stress. One lesson to be drawn from this chart is that the best time to buy gold is when everything is quiet, and the market is declining or running sideways. The largest year over year gains – in some cases 60% to 70% were realized when gold was purchased on the downslopes. These spikes were accompanied by heavy physical gold demand both in the United States and abroad with national mints and refiners running 24-hour schedules to keep up with coin and bullion demand.
Chart 3 - Real rate of return on U.S. dollar since 2001
Chart 3 offers the kind of fundamental analysis that drives the thinking of high-end investors and portfolio managers. A real rate of return – the gain on yields after inflation – is essential to maintaining and building wealth. As you can see in this chart, there has not been a real rate of return on dollar savings since the 2007-2008 financial crisis, and before true yield was scant. (The blue areas reflect the negative real rate of return.) The old strategy of building wealth slowly through an investment in yield instruments seems to have lost its credibility. Instead investors have been forced to raise their risk profiles – an unhealthy circumstance that also raises the prospect for significant speculative losses.
Chart 4 - Real rate of return on gold since 2001
Chart 4 illustrates why so many investors and portfolio managers have gone to gold as an alternative wealth building tool for the long run. The gold areas define the metal's real rate of return. As you can see, since the new century began those returns have been significant. This chart in a nutshell explains why Wall Street analysts and its attendant media are so critical of gold. It is the principal competitor to stocks, bonds and bank savings – and for good reason.
Chart 5 - Gold, monetary base correlation and divergence since 2001
