1802-2009 performance of equities, gold, bonds, cash. Stocks win big.
Dreman's book "Contrarian Investment Strategies: The Next Generation", published in 1998 has a section that quotes Jeremy Siegels "stocks for the long run".
It discusses the inflation-adjusted returns of stocks, gold, bonds, t-bills, and more over a very long period of 1802-1996.
GOLD: the data presented shows that Gold is a good wealth-preservation mechanism. Essentially gold has zero return. Over the entire 194 year periodthe movement of gold was marked by very few events. For 100 years from the early 1800s to the early 1900s it hardly moved at all.
However, gold was marked by a large bubble peaking around 1980 (as you all konw) which then slowly deflated over the next 15 years or so until gold had reached the "broken even" point, once again reaching a zero return. The graph ends in 1995 with $1 of gold invested in 1802 worth apparently, again, $1 in inflationa djusted dollars. Gold prices adjusted for inflation bottomed around 2000-2001, so gold fell below the long term trendline, meaning that it was "cheap".
Gold today appears to be above the long term trend line once again, and fairly significantly. I would guess that gold bought or held from here is not likely to be a good very long term hold. You are essentially at this point, from this fairly simple analysis, betting that a gold bubble forms.
However, gold may once again fall significantly below the long term trend of zero return (adjusted for inflation), and if it does it may well (as it did in 2000/2001) represent a good buy. And a bubble may form in gold from here, but it does appear that gold is a speculative play at this point unless someone has reason to believe that a 200 year trend of basically zero inflation adjusted return is going to break down permanently.
COMMODITIES: presumably... and i'm just guessing here... commodities, adjusted for inflation have a return of supply and demand. If demand for one commodity grows faster than supply, presumably its price goes up. Oil held a long term inflation adjusted price that was essentially constant from the end of WW2 to 1974. It spiked up dramatically in the 70's only to largely return to the long term trend in the 80's and 90's and dip below it in 1998. Beginning at the turn of the 21st century oil moved dramatically up.
Etc, etc, etc. Commodity investing appears to be betting on price fluctuations or long term supply and demand situations with ... assuming constant supply and constant demand... basically zero return. Preservation of wealth.
BONDS. Bonds yielded good returns adjusted for inflation until inflation began in the 30s. Since then, adjusted for inflation, government bonds yield very little after inflation. After inflation and taxes, their yield is decidedly negative. $100,000 invested in long term bonds in 1945 was worth about (adjusted for inflation and taxes) $40,000 50 years later. Not very good. Inflation helps the government cope with its debt load, but it essentially steals money (transfers wealth) from persons saving dollars to the government. Bonds had a 15 year bear market culminating in1980 with interest rates sky-high. They have had more or less a 30 year bull market since, possibly culminating in 2008 when the yieldon the 10 year went to 2%.
Bank CDs are, thus, an even worse investment.
CASH. A dollar saved in 1802 was worth, adjusted for inflation, about a buck until the roaring 20s when it dipped a little. The dollar saved in 1802 began to lose purchasing power in earnest in the 40s and by 1996 it was worth (adjusted for inflation) about 8 cents. Today it would be worth even less, perhaps a nickel.
STOCKS. So cash loses, Bonds have (as the bull market in bonds continues) probably roughly broke even since WW2, although they aren't likely to break even from here... buy them when they are down and they can be good investments, buy them when they are up and they can be big losers, overall they are break even or worse. Gold is a long-term break-even that does fluctuate at times, giving the occasional good buying opportunity and perhaps the occasional bubble. Commodities seem to be bascially zero return investments excepting the occasional bubble, anti-bubble, and substantial changes in supply and demand.
So what about stocks? From 1802 to 1996, adjusted for inflation, stocks returned 7% (including reinvestment of dividends and adjusted for inflation). There are bumps and blips on this super-long-term chart (indeed, the great depression doesn't look that dramatic when viewed over the course of 200 years. At the march lows stocks had not gone up in about 13 years, adjusted for inflation, or so. I didn't cacluate inflation -vs- dividend reinvestment.
Stocks win, they beat inflation. The chart is remarkably linear (blips aside, and believe me I get that some of those "blips", like the market crash of the 30s, are hardly trivial).
And now we are in a situation where stocks, adjusted for inflation and dividends, probably aren't up in 10-15 years. This is rivaled only from the period starting in the early 1900s to 1920 or so and the period from the mid-60's until the beginning of the big bull market in the 80s. And the Great Depression.
So in a 200 year history of stocks in the US, per Siegel and Dreman, we're in teh top 4. That doesn't mean this one couldn't go on to become #1... and that doesn't mean that stocks bought today won't go down or even down alot at somefuture point... but it does imply that today remains an attractive long term entry point.
Re-reading Dreman (the only how-to book on investing in equities, or investing at all, that i've ever thoroughly read) has tempered my recent bearishness... Its quite likely based on a look at the history of equity returns that we are probably still at a good entry point... We were probably at one of the best entry points in history in March.
More to come on hyperinflation and massive economic collapse and the like.