45 year Returns Matrix for Gold

Below is a returns matrix for gold since 1968. A returns matrix is a way of showing the return on an investment over a range of investment timeframes. Each square shows the compound annual return from investing in one year and selling in another – you pick a year from the bottom axis when you bought and draw a line up and then intersect with a line drawn from the left axis when you sold.

The top left shows the 1970s bull market, where compounded annual returns of over 20% could be made in a few years. The 2000s bull market shows similar concentration of high returns. This contrasts with the area I’ve called the “wasteland of returns” where any investment during the 1980 showed negative returns for many years: in the case of 1980, it took up to 25 years before registering positive returns; investing in 1995 it took 10 years.

The black diagonal line represents time periods of 20 years – anything to the left and below this shows the returns on gold for time period over 20 years. If you are planning for retirement then this is the sort of long term time period you are looking at for your investment. You will note that most of the returns are between 0% and 10% and nothing above 10%, which is not surprising as over the long run it is highly unlikely that any investment can show consistently high returns.

The area to the right of this black diagonal line shows a lot of variation in returns, which is another way of saying that if you invest in gold for the short to medium term you are taking on a lot of risk.

Another way of using this matrix is to draw a diagonal line for the time period you intend to invest and then count up the number of red, yellow, green etc dots and that gives you a rough probability of what sort of risk you are taking on. The longer the timeframe (that is the closer the diagonal line gets to the bottom left corner) the lower the number of red dots – as well as lower the number of purple.

The lesson for risk adverse investors from this matrix is that gold is a long term investment.