Top Performing Investments
The financial world is buzzing about Vanguard’s recent ad in The New York Times, which recommended a 60% stock and 40% bond portfolio mix, but made no mention of the top-performing asset of the last 20 years: gold. With a staggering 200% outperformance of stocks and 250% outperformance of bonds, the absence of gold in Vanguard’s ad is striking.
In fact, gold has proven to be a necessary investment during times of significant change, such as the one we are experiencing now. It’s no surprise that gold outperformed virtually every other asset in the first generation of this century. If you had invested in gold over the last 20 years, your return would have multiplied by five-fold, while a similar investment in the S&P 500 would have only tripled.
However, the real reason to consider gold is not just because of its safe-haven status in times of turmoil. Rather, there are several interlinked subliminal forces that could propel gold upward.
For starters, the disparity in growth between high-income and developing countries has begun to shift. In the 21st century, growth in the developing world has surpassed growth in the developed world. With China at the forefront, this trend is likely to continue, narrowing the gap in per-capita GDP between high-income and low-income countries. This shift could be a critical catalyst for gold’s upward trajectory.
In short, Vanguard’s ad may have missed the mark by leaving out gold, but you don’t have to make the same mistake. Investing in gold can be a smart move for anyone looking to diversify their portfolio and capitalize on the changing global economy.
The Developing World Will Tip The Scales
Growth in developing economies is qualitatively different from growth in developed ones. Specifically, growth in developing economies requires a lot more commodities per capita. Developed economies, by contrast, are primarily services-driven.
But what does this have to do with gold?
Everything. I wouldn’t want to bore you but stay with me here…
In 2019, developed countries earned about 70% of their GDP from services, while developing economies earned 55%. A generation earlier, the percentages were 65% for developed countries and 45% for developing countries.
Per-capita energy use is a good estimate for commodity needs. As long as a country has a small service sector and is developing, its growth will require increasing energy usage. When a country’s service sector reaches 67% of its GDP, the per-capita demand for energy and commodities overall starts to decline. Currently, the service sector accounts for 55% of GDP in the developing world. Therefore, there is still 12 percentage points more to reach the magical 67%, and it took 20 years for the figure to climb 10% from 45% to 55%. This suggests that we will likely face at least another 20 years of rising per-capita demand for commodities from developing countries, which make up the largest part of the world.
This inevitably leads to commodity scarcities and rising commodity prices, which are accelerated by the push to transition to renewable energy due to climate concerns. The rising demand for commodities has already reduced reserves for many critical commodities such as copper. Therefore, we will face at least two decades of pressure on commodities. This is why it is essential to consider top performing investments, such as gold and other critical commodities, as part of your investment portfolio. It is up to you to decide whether owning gold and commodities aligns with your personal investment objectives.
I want to emphasize that if you talk to American megalithic financial institutions, such as BlackRock, which manages trillions of dollars, they will recommend allocating your investments with a 60% stocks / 40% bonds ratio. However, it may be worth questioning whether this advice is still relevant and makes sense.
Over the past 20 years, gold bullion has outshined nearly all other top performing investments and asset classes in terms of total returns, including dividends. Let’s take a look at the numbers:
- Gold: 530.57%
- Baa Corporate Bond: 321.84%
- S&P 500 (including dividends): 298.61%
- Real Estate: 200.29%
- US T. Bond: 140.54%
- 3-month T.Bill: 41.18%
When considering the top performing investments or asset classes over the last 20 years, the old 60/40 investing rule is outdated advice. Most major financial institutions, including Vanguard and Fidelity, still push this diversification strategy, as if it were gospel. However, if you look at the past 20 years, which are unique, you will see that what has performed well when emerging economies and developing economies are growing is the gold sector. Additionally, gold has performed exceptionally well while the world has been focusing on transforming to green and renewable energy.
Disclaimer: The decision whether to view gold and commodities as a ballast is ultimately every investor’s decision, based on their investment goals and personal preference.
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