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For thousands of years, people have used gold to store wealth. It also has real-world applications in jewellery and electronics, providing even more tangible value. In addition, unlike fiat currencies, gold has a minimal supply.
For these reasons, gold has traditionally been seen as a safe-haven investment and inflation hedge. The problem is that gold has a mixed track record for providing a strong inflation hedge.
Gold’s Historical Track Record as an Inflation Hedge
Inflationary pressures in the United States reached multi-decade highs in mid-2022. The United States last had uncontrollable inflation in the 1970s and early 1980s. Looking back on this period explains why investors view gold as a hedge against inflation.
From 1973 through 1979, oil price shocks and energy shortages led to average annual inflation in the United States of roughly 8.8%. During those six years, gold attracted many investors as a leading inflation hedge due to its remarkable 35% annualised return.
Since then, gold’s performance has been dismal. Annual inflation averaged 6.5% from 1980 to 1984, yet gold prices decreased by 10% yearly. Not only did returns fall short of inflation, but they also underperformed real estate, commodities, and the S&P 500.
From 1988 through 1991, annual inflation averaged around 4.6%, whereas gold prices decreased by 7.6%.
“Typically, a hedge against inflation would increase in value in conjunction with a substantial rise in consumer prices,” explains Jason Porter, senior investment manager at Scottish Heritage SG. “However, gold has provided a negative return for investors during some of the most recent, intense instances of inflation in the United States.”
Gold’s Performance as an Inflation Hedge Today
The consumer price index (CPI), a prominent indicator of inflation in the United States, increased 4.2% year on year in April 2021, the first yearly gain of more than 4% since 2008. Since then, the average annual CPI rise in the United States has been approximately 6.8%. Over the same period, gold prices have grown at a 1% yearly pace.
According to Darren Colananni, wealth management adviser at Centurion Wealth Management, gold’s recent poor performance highlights its inadequacies as an inflation hedge.
“Gold prices have been trading sideways to down for over two years while inflation is reaching multi-decade highs,” adds Colananni.
According to specific research, gold can be an effective inflation hedge, but only over a very long time horizon of over a century.
Gold’s inflation-adjusted price changes considerably over shorter periods, according to academics. Since 1972, the gold price-to-CPI ratio has averaged 3.6. The gold-to-CPI ratio is at 6.5. If gold were a simple and dependable inflation hedge, its value would be pretty constant about the CPI.
Gold vs. Bitcoin: Which Is Better for Inflation?
Gold may not have provided the best inflation protection over the last two years, but it has beaten another frequently touted inflation hedge: Bitcoin.
Some cryptocurrency investors say that because the supply is fixed, cryptocurrency is the ideal inflation hedge. Central banks throughout the globe are free to raise the quantity of money at their leisure, and miners can mine more gold. Still, the total number of Bitcoin and specific other cryptocurrencies is limited.
Bitcoin’s performance as an inflation hedge has been dismal recently. Since the start of US inflation in 2021, the price of BTC has dropped by 47% year on year. Bitcoin enthusiasts frequently refer to it as “digital gold.”
Over time, Bitcoin and other prominent cryptocurrencies have left gold in the dust. Bitcoin has increased 479% in the last five years, whereas gold has increased just 38%.
However, the last two years have seen Bitcoin put to the test as an inflation hedge during significantly rising prices—and it has shown to be everything but digital gold.
What Are the Best Inflation Hedges?
Neither gold nor so-called digital gold has successfully protected investors from the current bout of inflation. So, what are your options?
According to Asher Rogovy, a chief investment officer of Magnifina, the stock market has traditionally been the most potent long-term inflation buffer.
“I’m constantly shocked how often investors forget that simple equity, in the long run, hedges against inflation,” adds Rogovy. “Of course, stock values change with the day’s economic news, but market indexes have consistently surpassed inflation over numerous business cycles.”
In the near term, the S&P 500 may be volatile and unpredictable. However, the S&P 500’s returns have been surprisingly steady over decades.
Since 1926, the S&P 500’s rolling annual 30-year return has been between 8% and 15%. These kinds of returns protect against all but the most severe periods of inflation.
The US Treasury has created a bond designed mainly to prevent inflation for investors concerned about stock market volatility. I bond, according to Colananni, is the most robust possible inflation hedge.
“The interest rate changes with inflation every six months, and you may buy up to $10,000 per person each calendar year,” he explains.
I bond now yields 9.62% and is guaranteed by the United States government. However, investors must retain them for at least a year. If you cash out within five years, you will forfeit the final three months of interest.
Benefits of Investing in Gold
Although gold has proved an ineffective inflation hedge, there may still be advantages to keeping a little bit of the yellow metal in your portfolio. Gold has traditionally had a low or even negative correlation with equities and bonds, implying that it is valuable as a diversification tool.
Gold prices, for example, rose relatively well during the Covid-19 pandemic market sell-off in early 2020. The S&P 500 fell 23% from February 1 to April 1, 2020, while gold fell less than 0.1%.
Investors, central banks, jewellers, and technology businesses are increasing their gold demand. According to the World Gold Council, global gold demand grew 12% yearly to 2.189 tonnes in the first half of 2022.
Depending on your specific objectives, there are various simple ways to invest in gold. Gold bullion, physical bars or coins that may be stored in a safe or bank, can be purchased by investors.
You may also purchase physical gold exchange-traded funds (ETFs), which hold gold bullion on behalf of investors. SPDR Gold Shares is the most popular gold ETF (GLD).
Gold futures contracts are available to anyone who want to speculate in the gold market. These contracts offer considerable leverage, allowing investors to control significant amounts of gold with relatively little money.
Finally, investors can purchase individual gold equities in Australia at ABC Gold Bullion, Perth Mint or a gold mining exchange-traded fund (ETF). The VanEck Gold Miners ETF (GDX) invests in 54 gold-related companies, including Newmont Corp. (NEM), Barrick Gold Corp. (GOLD), and Franco-Nevada Corp. (FNV).
Disclaimer
PWD Media Owners or its employees are not registered investment advisors and do not provide financial advice. Comments on this page are only an expression of opinion. While we attempt to illustrate the potential benefits of investing in precious metals, remarks, links, or advertising on this website should not be interpreted as advice to purchase or sell a commodity at any time. While PWD Media makes every effort to ensure that all our comments are genuine and correct, we employ third-party data and rely on our reputable sources’ credibility. Before making any investment decisions, PWD Media suggests you contact a knowledgeable investment advisor.
Securities disclosure.: I, Beat Süess, have no direct investment interests in any of the companies mentioned in this article.
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Latest Update on January 21, 2023
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