Gold Versus the Stock Market – Which Will Deliver the Biggest Returns?

More and more people are now looking at gold again, as the stock market shows signs of faltering after its recent rally of March to August 2009. The question is, will gold resume its upward trend if stocks decline again, or will it join other commodities in losing its value in the recession?

Traditionally the stock market has been the best vehicle for capital appreciation. Until the autumn of 2008 stocks had on average grown in value at a higher rate than anything else. The failure of the banking sector in Europe and the United States and the subsequent government bail-outs led to a crash in share prices, which in turn caused a surge in the price of gold to nearly $1,000 an ounce.

The subsequent stock market rally, starting in March 2009, led to the price of gold stalling and then declining towards $900. It can be seen from this that gold tends to do well when stocks are depressed and not so well when stock prices are rising.

On the other hand, gold is a commodity like any other commodity, and commodity prices, like most other prices, have tended to stay depressed since the start of the recession. So we have to consider whether gold can be differentiated from other commodities in the present situation.

The obvious difference between gold and other commodities is that gold is not just a commodity – it’s also a perceived store of value. Other precious metals like silver and platinum are also used as investment vehicles, but gold is the most popular, against which currencies are measured.

Currencies have in nearly every country declined steadily over the last hundred years or so. Inflation may not be the beast it was in the 1970s, but it’s still there, and it always has been since modern banking and finance evolved. Now we have a situation where both the US and the UK governments have borrowed billions to bail out the banks, and engaged in “quantitative easing”, i.e. money creation, in order to try and spend-borrow their way out of the recession.

What is this going to do to the price of gold? Gold is scarce, which is one of the reasons that it is perceived as valuable. Nearly all the gold currently mined goes into industrial uses and personal ornamentation. Very little is added to the coffers of national exchequers.

The price of gold therefore has to rise from its present level. Most other things will also rise in price over the forthcoming months and years as the increased money, with no increase in production to justify it, comes into circulation. With all the stock trading charts showing depressed prices, and inflation reborn, gold, the traditional refuge of capital in times of uncertainty, will most likely at least double in value over the next few years.

In summary, gold will almost certainly out-perform the indices of the world’s stock markets in the short to medium term future.