Gold’s Long-Term Performance: Historical Returns and Key Drivers

Long-term readers might be familiar with our coverage on gold as an asset class. Shortly after the financial crisis in 2008, Gold was a sought-after asset for long-term investment portfolios and wealth preservation. Unfortunately, as Gold peaked in 2012, it soon lost its allure. Recently, gold again became a hot topic as it breached out its all time high. It’s a good time to revisit its long-term performance and examine the key drivers behind its returns. 

Background on Gold as a store of value and safe haven investment

Gold’s long-term historical returns

Let’s first take a look at gold’s long-term returns. 

Long-term returns from 1971-2024 compared with stocks

Since 1971, when the U.S. abandoned the gold standard, gold’s price has experienced significant changes. Based on Statista, over the period from 1971 to 2024, gold’s annualized return has been approximately 8%, which is lower compared to the annualized return of about 10.7% for the S&P 500. 

Compared to the annual CPI (inflation) rate of 3.96% from 1971 to 2024, gold has preserved its value well and outpaced inflation by a big margin.

Returns from 1980 to present (2024)

The price of gold peaked in 1980 due to high inflation, geopolitical tensions, and economic uncertainty, reaching over $800 per ounce. Since then, gold’s performance has been more volatile. From 1980 to 2024, the annualized return for gold has been around 3.6%. This period saw gold prices move through prolonged periods of stagnation and occasional spikes, notably during the financial crisis of 2008 and the COVID-19 pandemic in 2020.

Compared to the annual CPI (inflation) rate of 3.1% from 1980 to 2024, gold’s annualized return of 3.6% is slightly above the inflation rate. This performance over the long 44-year period also highlights the volatile nature of gold’s price behavior.

Key drivers behind gold price

Although many people perceive gold as an inflation hedge, we want to take a closer look at how gold prices have been affected by key drivers since 1971, when its price began to freely float following the US abandonment of the gold standard. The following are the four main key drivers:

• Inflation
• Interest rates and monetary policies
• Economic cycles
• Geopolitical events and international demand

1970s (high inflation): inflation hedge and positive correlation with interest rates

• Background:
  • The 1970s experienced high inflation due to oil shocks and loose monetary policy.
  • Interest rates were increased to combat inflation.
• Gold Price Movement:
  • Despite rising interest rates, gold prices surged.
  • Investors flocked to gold as a hedge against rampant inflation. Gold prices increased from around $35 per ounce in 1971 to over $800 per ounce by 1980.

This period clearly demonstrates that gold was an effective inflation hedge. It was also a time when both gold prices and interest rates were rising, showing a positive correlation between the two.

Early 1980s Volcker Shock (transition from high inflation to lower inflation): negative correlation with interest rates initially

• Background:

  • Federal Reserve, under Paul Volcker, raised interest rates aggressively to combat high inflation. 
  • Inflation peaked in the early 1980s before starting to decline.

• Gold Price Movement:

  • Gold prices initially rose, reaching a peak in 1980.
  • As inflation was brought under control and real interest rates increased, gold prices started to decline. Its price peaked at $850 in January 1980 and then dropped to $300 by 1985. 

This period initially marked a rapid rise in interest rates. Afterward, the rates experienced several minor fluctuations but generally declined from 19% in January 1980 to 7.3% in 1985. During this time, gold prices were first negatively correlated with interest rates when investors perceived that inflation would be tamed as Volcker raised interest rates. Gold prices then started to positively correlate with declining interest rates and felt along with interest rates. 

1985-2000 (Generally Low Inflation): Gold Prices Were Flat as Inflation and Interest Rates Trended Down

• Background:

  • A period of declining inflation during which the economy generally performed well
  • Interest rates also declined

• Gold Price Movement:

  • Gold prices experienced several periods of fluctuations.
  • But they eventually settled down to almost the same level as in 1985

One can say this was a so-called ‘prosperous’, low inflation period, during which gold lost its allure.

2000 (technology Bubble), 2008 (financial crisis), and 2020 (COVID-19 Pandemic): late phase safe haven

• Background:

  • Since 2000, the US economy experienced three major crises. 
  • Interestingly, the three crises are distinct: the 2000 crisis was more concentrated in the technology sector, while the 2008 crisis was broader, caused by the overleverage of household real estate. The COVID-19 pandemic was a sudden and short-lived health crisis.

• Gold Price Movement:

  • In each crisis, gold prices initially dropped dramatically, but in the later phases of the crisis, they recovered strongly.
  • The reason for this pattern is that investors were initially forced to sell assets to cover losses, but gold prices eventually recovered as the crises subsided or were actively dealt with by government interventions.

Investors should be aware that, unlike Treasury bills or bonds, gold is not viewed as the ultimate safe haven and can also suffer significant losses during a crisis.

2023 to present (Inflation trending down):  international or geopolitical or economic uncertainties

• Background:

  • As the Federal Reserve actively raised interest rates to combat inflation, inflation stabilized and began to trend downward since May 2023.
  • However, it’s been noted that the West (the US and Europe) actually experienced outflows in terms of gold ETFs and physical gold.

• Gold Price Movement:

  • Gold prices started to decline, but in October 2023, they began to rise and eventually reached all-time highs.
  • It’s been observed that this movement, while contradicting gold’s normal positive correlation with inflation, is mostly due to international buying, especially from China and other Asian countries.
  • China, in particular, has strict currency controls and its economy has now entered a period of very weak growth.
  • The value of the Chinese currency has declined against the US dollar.
  • As a result, Chinese people have been actively accumulating gold to preserve their wealth.

This is an interesting period where gold prices are now strongly influenced by global demand, as gold itself is a global hard asset. Even though in the US, as inflation trends down currently, gold prices defy conventional wisdom and continue to rise.

Summary

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