Why investors are ditching stocks for gold
If you would put $10,000 into the S&P 500 back in 2000, that investment would have grown to over $75,000 today. However, if instead you would place that same $10,000 into gold, it would now be worth around $136,000.Past performance isn’t a reliable indicator of future results.
In other words, the so-called safe haven medal has more than doubled the return of what many considered the world's best businesses.
But it's not always been the case. If we zoom back out in history, gold has not always been the king. From 1990 to March 2000, the S&P 500 returned 460%. Gold, on the other hand, actually lost a third of its value. So, we're left with two very different cycles. A decade where stocks dominated and another where gold is led. We've been in that second environment for the past few years.
But the question now is what's next?
To understand that, we need to look at one of the key macro forces driving gold.
That is the US government's budget balance. In fact, this was one of the biggest reasons behind gold's underperformance in the 1990s. As we can see in the chart, from July 1992 to September 2000, the US government flipped its budget from a $300 billion deficit to a $240 billion surplus.
That strong fiscal position boosted confidence in the US dollar, and global central banks responded by increasing the share of reserves they held in dollars. As demand for dollar assets grew, gold lost its appeal. Prices fell by a third while stocks thrived on the back of healthier government finances in a booming economy.
In the 1990s, as the US moved into surplus, central banks lifted their dollar reserves from about 30% to nearly 50% while gold's share steadily declined. That steady selling became one of the strongest forces behind gold's weakness during that decade.
Since then, the picture has reversed. Over the past 25 years, the US has consistently run budget deficits. When deficits are large and persistent, confidence in the dollar weakens. Central banks then look for alternatives, and gold becomes the natural choice. That's exactly what we've seen.
While stocks continue to deliver solid returns, gold surged even more, driven by this steady shift in central banks demand.
Since 2010, central banks have been consistent net buyers of gold. And that demand has only accelerated, and annual purchases have stayed above 1,000 tons since 2022, the fastest pace in more than 55 years. Today, central banks account for nearly a quarter of global gold demand, making them one of the most important forces behind gold's outperformance.
It's not just central banks, either. Now, retail investors are piling in, too. In China, for example, households have been pouring money into gold ETFs. More than $6 billion of inflows in just the first half of 2025.
These physically backed gold ETFs have allowed households to gain exposure without the need to store physical bullion. and retail participation adds another source of demand on top of central bank buying.
All of this has brought the S&P 500 relative to gold ratio down to one of its lowest points in the past 5 years. In other words, gold has rarely looked this strong relative to stocks in recent history. The real question now is what comes next?
Will gold's lead continue to widen or are stocks about to stage a comeback?
From here, there are two possible paths.
The first path is if US deficits stay high. According to the Congressional Budget Office, US deficits are expected to average more than $2 trillion per year over the next decade. This could put more pressure on the dollar's long-term outlook and makes the case stronger for central banks to keep diversifying into gold as a reserve asset and could allow gold's outperformance to continue.
In fact, that seems to be what the market is pricing in currently. With central banks still buying at a record pace, deficits showing no sign of narrowing, and analysts projecting further upside, many expect the S&P 500 to gold ratio could drift even lower from here.
The second path, however, if the US government were to show real improvement in its budget deficit. The picture could flip. A stronger fiscal outlook would likely restore confidence in the dollar and treasuries, reducing central bank demand for gold. That could put pressure on today's elevated gold prices and even shift performance back in favor of other assets like equities.
At capital.com, we'll keep you updated on the shifts between gold, stocks, and other key market drivers. Explore more insights in our Educational Hub.
