Is gold a good investment in 2011 (so far)?

How did gold do during 2011 compared to other investments such as the S&P500? Let’s examine this matter as we are nearing the half year mark:

Many seek out to invest in precious metals, mainly gold, in order to hedge against the fall of the US dollar. Considering the slow recovery of the US economy and the stimulus plans of the Federal Reserve (i.e. QE1 and QE2) it’s no surprise that people seek investments to protect their funds.

During the last couple of years gold prices have nearly doubled mainly after the 2008 recession kicked in.

There are still ample concerns over the stability of the US currency and investing in US dollar based investment such as stock market and US government bond. The later is next to nil for the short term range, because of the zero basic interest rate of the US.

Therefore this drive to gold is understandable despite its many limitations, to name a few: high margins, high volatility, transactions fees and no dividend offered.

Since we are almost near the half year mark, let’s examine the investment in gold compared to other investment plans – the stock market, in particular the S&P500.

For long term investors this exercise isn’t less important, but for short term traders this is something worth doing once in a while:

The chart below shows the daily changes of S&P500 and gold prices both normalized to December 31st, 2010 up to date.


Chart Gold Prices and SNP500 Jan 2011- MAY 2011 27 MAY

During the first three months of 2011 the S&P500 had over performed gold prices; by the end of the May, both of these indexes reached similar levels and are currently close with gold prices are up by 7.2% and S&P500 is up by 5.4%.

The volatility of gold price daily percent changes had a standard deviation of 0.85% and S&P500 had 0.75%.

These figures show that with nearly half a year into 2011, gold and S&P500 are very similar even though gold started off the year very low and was a bit more volatility.

In fact, during May these two indexes seem to be correlated, more than before. This might suggest that there is a link between these two indexes in the last few weeks that affect both these investments.

Correlation Gold & Silver Prices and SNP500 Dec 2010- MAY 2011 27MAY These findings show that gold isn’t doing much better in 2011 (so far) than other investment tools such as S&P500; in fact, if you consider the caveats, which I have listed above, of investing in gold, then during 2011 this investment didn’t necessarily perform as well as it did in the last couple of years.


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