Time to Buy Equity or Gold ?

In 1971, a significant change took place in the global financial system. The U.S. decided that the dollar would no longer be backed by gold, ending a system known as the Bretton Woods Agreement. Before this, the U.S. dollar was tied to a fixed amount of gold, allowing countries like France and Italy to exchange their dollars for gold. However, this system was halted by President Nixon, who initially stated it was a temporary measure. But it became permanent, and the dollar was set free, no longer needing to be backed by gold. This change caused the price of gold to skyrocket in the years that followed.

The Gold Boom

After the dollar was no longer tied to gold, the price of gold saw a dramatic increase. Between 1971 and 1980, gold’s price surged from around $30 per ounce to $800 per ounce. This rapid rise was due to the newfound freedom of gold in the market, as it was no longer restricted by a fixed price. During this period, gold outperformed many other assets, becoming a valuable investment. However, this success was not permanent, and the value of gold relative to the stock market, specifically the S&P 500 index, began to fluctuate over the coming decades.

Comparing Gold and the S&P 500

A chart that compares the S&P 500 index with gold shows an interesting trend over the last 50 years. If someone had invested in gold in 1971 instead of the S&P 500, they would find themselves at a similar value today. However, this comparison has not been consistent over time. There were periods when gold outperformed the S&P 500, such as in the early 2000s, and other times when the S&P 500 surged ahead, leaving gold behind. Despite these ups and downs, the overall ratio between the S&P 500 and gold has remained remarkably stable over the last five decades.

Where Should You Invest?

Given the historical data, the question now is where to allocate your money: in equities like the S&P 500 or in gold? With equities having performed well for a long time, some investors believe that commodities, including gold, may be due for a comeback. Even if this does not happen, it may still be wise to consider allocating a portion of your investments to gold. Gold is currently an under-owned asset class, while equities are heavily favored by investors globally. Adding gold to your portfolio could provide a good hedge against potential market downturns.

Balancing Your Portfolio

A common strategy for balancing a portfolio involves a mix of equities and gold. One approach is to allocate 75% to equities and 25% to gold. Some investors rebalance their portfolios annually to maintain this ratio. For example, if by the end of the year your portfolio has shifted to 80% equities and 20% gold, you would sell some equities and buy more gold to return to the 75/25 split. This method helps maintain a balanced portfolio and can protect against market volatility.

The Importance of Gold

Gold should not be seen as a competitor to equities but rather as a hedge against market risks. While equities may provide higher returns over the long term, gold offers stability during uncertain times. For high-net-worth individuals, maintaining a consistent allocation to gold is a common practice. A good rule of thumb is to have an amount of gold in your portfolio that corresponds to half your age as a percentage of your net worth. This simple strategy can help ensure that you are not overly exposed to the risks of the stock market.

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