Investor Minute
How Does Gold Perform Historically as a Hedge Against Inflation?
Gold has been fascinating people for tens of thousands of years. It never rusts, or even tarnishes. It’s soft enough to be worked into beautifully intricate designs.
No wonder ancient rulers wanted their crowns, scepters, and even thrones covered in gold.
Gold has been used as a currency for thousands of years. And in more recent times, has backed the value of paper money.
Because it seems to have intrinsic value, this king of the precious metals is often touted as a hedge against inflation. It’s just common sense to assume that when the price of everything else is going up, so will the price of gold.
Several years ago, just as the pandemic was sending shock waves through the economy, Donald Calcagni, chief investment officer at Mercer Advisors, did an analysis of gold’s performance against inflation over the past forty years. He found that from 1980-1999 gold lagged behind inflation. For 2000-2009 it performed very well, beating inflation by more than 10%. And for 2010-2019, it again came out ahead, but this time by little more than 1.5%.
However, when the four-decade period was taken as a whole, gold lagged by .54%. And over three of those decades it had price volatility that was greater than stocks.
During the high inflation of the past two years, gold fared much worse. Between 2020 and 2022 inflation increased 14% while gold fell 3.7%. In 2022, when stocks and bonds produced double-digit declines, in real terms gold fell by more than 5%.
Claude Erb and Campbell Harvey in their 2016 study, “The Golden Constant,” concluded: “While gold might protect against inflation in the very long run, 10 years is not the long run. In the shorter run, gold is a volatile investment which is capable and likely to overshoot or undershoot any notion of fair value.”
As an illustration of gold’s ability to preserve value over very long time periods, it’s been said that an ounce of gold 2000 years ago could pay for a Roman centurion’s apparel. And that today that same ounce of gold can pay for a good suit of clothes for an executive. However, this comparison does not take into account the immense gains in productivity that technology has brought to modern garment makers. Today’s ounce of gold could not pay for a hand-sewn suit, made from hand-woven material, created from hand-dyed thread.
But despite its under-performance as an investment, there’s no denying gold’s popularity. The prudent investor should be on guard as each hiccup in the market gives gold touters another opportunity to sell more of it as a potential safe harbor.
The best protection against inflation is a broadly diverse portfolio, one that contains asset categories that move in somewhat dissimilar ways but tend, over the long haul, to outpace inflation. Talk to your trusted advisor about your best options for long-term success. Click this link to schedule a free call with us today.