Perspective Piece - Goldomics 103: Gold as a Shield and Investment Prospector
Gold Outperforms S&P 500 Over Half a Century, Offers Inflation Hedge
In a span of more than five decades, gold has demonstrated a remarkable performance, slightly outperforming the S&P 500 while offering a strategic advantage as a diversifier and inflation hedge.
Since the United States left the gold standard in 1971, gold prices have shifted from fixed to market-driven, undergoing ups and downs but showing resilience during times of economic uncertainty and inflation. This shift has resulted in gold delivering a long-term average annual return of around 10%, outpacing the S&P 500's 9% average return over the same period, though gold’s returns have been more volatile with a volatility of approximately 27% compared to the S&P 500’s 17% volatility.
The cumulative return for gold was about 541%, while the S&P 500 was about 484% from 1971 to 2025. It's important to note that the S&P 500 reflects underlying equity market returns, averaging near 9-10% nominal returns including dividends, but generally being more correlated with economic growth measured by GDP.
Gold's role is often as a diversifier and inflation hedge rather than purely a growth asset. This non-correlated behavior and inflation protection make it a strategic addition to diversified portfolios, especially during economic uncertainty and inflation spikes such as those seen recently in 2024–2025.
In the shorter term, gold price is driven by "animal spirits," which show up in certain asset, wholesale and/or producer prices, whilst the longer-term performance is primarily driven by "monetary spirits." A bubble eventually bursts when "monetary spirits" are finally reined in by monetary realities.
Recently, gold prices dropped about 6 percent and silver 12 percent on April 2 due to U.S. President Donald Trump's "Liberation Day" tariffs. However, a pause in the tariffs was announced a week later, ending on August 1. Since the pause, gold has risen approximately 11 percent and silver 24 percent.
The In Gold We Trust (IGWT) report suggests differentiating between safe-haven gold and performance gold for potential gains in the coming years. The IGWT recommends an investment portfolio rule of thumb that includes 15 percent in "safe-haven gold" and 10 percent in "performance gold."
In conclusion, gold has proven to be a valuable asset in a diversified portfolio, offering protection against inflation and providing a hedge against economic uncertainty. Its performance reflects a balance between shorter-term market sentiment and longer-term monetary factors, making it an attractive investment option for many.
| Asset | Cumulative Return (1971–2025) | Avg. Annual Return | Volatility | Notes | |--------------|-------------------------------|--------------------|------------|----------------------------------------| | Gold | ~541% | ~10% | ~27% | Highly volatile, inflation hedge, strong recent gains[2][3][5] | | S&P 500 | ~484% | ~9% | ~17% | Broad equity market, correlated with GDP growth[2] | | U.S. GDP | N/A | ~2–3% real | N/A | Real economic growth; gold outpaces in nominal terms[2][4] |
Sources: [1] World Gold Council [2] St. Louis Federal Reserve [3] Kitco [4] Bureau of Economic Analysis [5] BlackRock Investment Institute
Investing in gold as part of a personal-finance strategy could offer a unique advantage, particularly during times of inflation or economic uncertainty, given its role as a diversifier and inflation hedge, outperforming the S&P 500 over the past half-century. Gold investors should consider exploring different types of gold investments, such as safe-haven gold and performance gold recommended by The In Gold We Trust report.
