Kalo Gold Corp. (TSXV: KALO, OTCQB: KLGDF)
A large, consolidated gold exploration opportunity in one of the Pacific Ring of Fire's most stable and mining-friendly jurisdictions.
The latest data shows that U.S. inflation has just hit a three-year high. The May CPI rose 4.2% year-over-year, up from 3.8% in April, driven mainly by rising energy costs and the Middle East conflict. Against this backdrop, the market widely expects the Federal Reserve may be forced to raise its benchmark interest rates further to slow economic growth and tame inflation.
In this environment, many investors naturally think of gold — the traditional hedge against inflation. However, gold prices have retreated about 24% from their all-time high of $5,589 per troy ounce in January of this year. At the same time, the S&P 500 remains near record highs, with a price-to-earnings ratio of 32 — clearly not cheap.
On one side sits the “traditional safe haven”; on the other, “expensively valued U.S. stocks.” How should investors choose? Let’s look to historical data for answers.
Gold: A Pessimistic Bet Against the U.S. Dollar
The logic behind gold’s rise is not complicated. Most major currencies (including the U.S. dollar) have long since left the gold standard and become fiat currencies backed solely by “trust.” To stimulate economic growth, central banks continuously increase the money supply and lower borrowing costs, which inevitably leads to the long-term depreciation of fiat currencies. Since gold is priced in U.S. dollars, the weaker the dollar, the more valuable gold becomes.
Over the past 20 years, the spot price of gold has risen by approximately 655%. That sounds impressive, but over the same period, the total return of the S&P 500 (including reinvested dividends) reached 785%, significantly outperforming gold. In other words, if you had bought an S&P 500 index fund 20 years ago and held it, your return would have been about 130 percentage points higher than if you had bought gold.
The S&P 500: The Optimist’s Long-Term Choice
The S&P 500 is rebalanced every quarter, ensuring that only the strongest and largest U.S. companies remain in the index. This means that as long as you believe large U.S. companies can continue to innovate, improve efficiency, and navigate economic cycles, buying an S&P 500 index fund is the simplest way to bet on the long-term growth of the U.S. economy.
History over the past 20 years has shown that not only has the S&P 500 delivered impressive gains, but the vast majority of actively managed funds cannot consistently beat it. In contrast, gold is more of a “pessimistic” investment — people tend to load up on gold when they worry about a collapsing dollar, an out-of-control economy, or worsening geopolitical conflicts.
Should You Buy GLD or VOO Today?
The SPDR Gold Trust (GLD) is the world’s largest gold ETF, while the Vanguard S&P 500 ETF (VOO) is a leading ETF tracking the S&P 500. Both have their pros and cons, but a reasonable prediction is that the S&P 500 (with reinvested dividends) will likely continue to outperform gold over the next few decades.
The reasoning is as follows: gold prices have fallen sharply from their historical highs and may remain under pressure in the near term. Meanwhile, although the S&P 500 looks expensive, the index’s constituent stocks have a self-correcting mechanism — underperforming companies are removed and strong growers are added. This “survival of the fittest” dynamic gives the S&P 500 a higher degree of long-term certainty than a single commodity.
Of course, this does not mean gold has no place in a portfolio. For investors seeking to diversify risk and hedge against extreme tail events, a modest allocation to gold (say, 5%-10%) is still reasonable. But if you have to choose only one to hold for the long term, the historical data sides with the S&P 500.
Conclusion
When inflation is high, gold is often hotly discussed, but history shows that what truly can weather cycles and keep reaching new highs are America’s best publicly traded companies. Rather than betting on the decline of the U.S. dollar, it is better to bet on the continued growth of human creativity. For the average investor, dollar-cost averaging into an S&P 500 index fund may be wiser than chasing short-term fluctuations in gold.
