According to a report by The Motley Fool, data from the US Bureau of Labor Statistics showed that prices rose by 4.2% in the 12 months to May, after an increase of 3.8% in April. These pressures may push the Federal Reserve to raise interest rates again, with the aim of calming economic growth and controlling inflation.
Despite these data, the S&P 500 index is still close to its record levels, but it appears to be historically high in value, as it trades at about 32 times earnings. On the other hand, gold, which is traditionally seen as a tool to hedge against inflation, fell by about 24% from its highest level recorded in January, when it reached $5,589 per ounce.
The report poses a basic question: Will investing in the “SPDR Gold Trust,” known as the symbol “GLD,” become a better option than investing in the “Vanguard S&P 500 ETF,” known as the symbol “VOO,” which tracks the performance of the most famous American stock index?
Why are gold and stocks long-term options?
The report indicates that most major currencies, including the US dollar, were in the past backed by gold, but today they have become paper currencies based on trust in the governments that issue them.
Over time, these currencies lose part of their value due to increased money supply and reduced borrowing costs to stimulate economic growth. Since gold is priced in dollars, a decline in the value of the US currency often makes gold more attractive.
For this reason, the spot price of gold has risen by 655% over the past 20 years. In the same period, a commodity that cost $1 in 2006 now costs about $1.66.
In contrast, the S&P 500 index, which includes 500 of the most prominent American companies, rose by 504% over 20 years, and with reinvestment of distributed dividends, the total return reached about 785%.
The report believes that the strength of the S&P 500 index is due to the fact that it is rebalanced every quarter, which ensures that the strongest companies remain within the index weighted by market capitalization. For this reason, many hedge funds still fail to outperform it over the long term.
For investors who are betting on the continued growth of the largest American companies, even in light of economic pressures and the decline in the value of the dollar, investing in the S&P 500 index remains a long-term option.
Which is better today?
The report considers that investing in gold via “GLD” represents a more conservative or pessimistic option, because it is practically linked to betting against the US dollar. As for investing in “VOO,” it is a more optimistic bet on the future of the American economy and the growth of its major companies.
The writer points out that both funds may witness fluctuations, but it is likely that the S&P 500 index, especially with the reinvestment of profits, will continue to outperform gold in the coming decades, if major American companies continue to expand and increase their profits.
Thus, high inflation does not eliminate the attractiveness of gold as a traditional haven in times of anxiety, but it is not sufficient alone, according to the report, to change the long-term outlook on US stocks, which have historically proven their ability to achieve strong returns over time.
