• Hardly any correlation between the development of the gold price and inflation
• Gold has a history of negative performance during periods of high inflation
• Experts recommend other asset classes to protect against inflation
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Rising consumer prices are currently making inflation concerns a key issue for stock market investors. Experts are also concerned. If the fear of currency devaluation increases on the market, this is usually the moment for gold. The precious metal is often used to protect portfolios against inflation because its natural occurrence is limited, it is required in industry and it cannot be devalued by monetary policy measures. But the reputation that the precious metal enjoys as a hedge against inflation may be unfounded. Because, as an analysis of historical data shows, the raw material was anything but a reliable hedge in the past.
Expert: “Gold is not a perfect hedge”
According to CNBC, for an investment to be considered a protection against inflation, its value should always increase when inflation in the form of consumer prices also increases. That’s not the case for the price of gold, however, according to an analysis by Morningstar portfolio strategist Amy Arnott, available to the US media. According to Arnott, gold prices and inflation have had a correlation of just 0.16 over the past 50 years. As a reminder, the closer the correlation value is to 1, the more likely it is that two assets will move in sync. However, a correlation of only 0.16 means that there is almost no relationship between the two values. “There is no guarantee that if inflation increases, gold will also generate above-average returns,” Amy Arnott said of the data, according to CNBC. In fact, the situation looks even bleaker. According to the Morningstar strategist, a look into the past shows that gold is “really not a perfect hedge”. Because the precious metal has lost some of its value significantly in times of high inflation.
Inflation vs. gold price: Historical performance leaves something to be desired
As part of her analysis, Arnott looked at three periods over the past 50 years when inflation was particularly high in the US and examined how the price of gold performed during those periods. Between 1973 and 1979, for example, the average annual inflation rate was 8.8 percent, well above the two percent target that the US Federal Reserve is currently aiming for. During this period, however, gold lived up to its reputation as a safe haven, with an investment in the precious metal delivering returns of 35 percent during this period, according to the portfolio strategist. But a short time later the picture changed. As “CNBC” reports, citing Amy Arnott’s study, gold investors lost an average of ten percent in the years 1980 to 1984, although the annual inflation rate of 6.5 percent was also very high in these years. Something similar could also be observed from 1988 to 1991: While the inflation rate averaged 4.6 percent, gold lost around 7.6 percent in value during this period.
According to CNBC, this record suggests that investors looking to use gold as a portfolio hedge are making a risky bet. This also underpins an analysis of “Seeking Alpha”. The website looks at the entire period from 1978 to 1995, as this was the period with the highest inflation rates since World War II, and concludes that the price of gold has not kept pace with the US Consumer Price Index (CPI), nor has it was able to outperform this, as one would actually expect from a good inflation hedge. Instead, the price of gold has been very volatile during this period, ultimately gaining only around 71 percent, while the CPI has increased by around 127 percent. According to “Seeking Alpha”, between 1980 and 2000 the precious metal even lost 43 percent in value, while the CPI rose by around 120 percent.
Experts recommend these asset classes to hedge against inflation
Given that gold has not proven to be a good hedge historically, Morningstar’s Amy Arnott recommends investors concerned about rising consumer prices also consider other asset classes. Michael McClary, CIO of Valmark Financial Group, told CNBC that “don’t buy it just because you think inflation is coming.” In his opinion, a mixed portfolio consisting of stocks, REITs, commodities such as oil, which can be invested in via ETFs, and Treasury Inflation Protected Securities, or TIPS for short, would offer better protection. The latter are special bonds that offer protection against inflation and low interest payments.
As “CNBC” reports, REITs and commodities in particular have a better track record than gold, according to Amy Arnott’s analysis. From 1973 to 1979, REITs appreciated about 11.5 percent, while commodities gained 19.4 percent. From 1980 to 1984, REITs were up 20.4 percent and commodities were up 2.3 percent. And in the most recent period studied, 1988-1991, REITs were up 9 percent, while commodities were up 21 percent.
Long-term balance of gold is better
However, there is one consolation for all gold fans: The Morningstar analysis only looked at periods of a few years. According to Arnott, however, gold’s long-term record as a hedge against inflation – measured over several decades – is significantly better and fits more with the yellow precious metal’s reputation as a safe haven: “If you look at very long periods of time, gold should hold its value against inflation “The strategist said, according to CNBC. “But in any shorter period of time, it may or may not be a good hedge.”
Editorial office finanzen.net
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