Gold: Don’t Buy the Hype

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The number of coronavirus cases in the United States has eclipsed five million and the U.S. economy is mired in its deepest recession since the end of World War II. To combat the crisis, Congress passed the largest fiscal stimulus package in history and is in the later stages of negotiating another round. Preliminary estimates put the total price tag of already enacted stimulus somewhere in the neighborhood of $6 trillion dollars.

That’s twelve zeros.

In response to this unprecedented fiscal stimulus, investors have turned to perceived “safe havens”, specifically gold, to hedge their portfolios against the prospect of runaway inflation. But does history support this belief? And what should advisors be thinking about for client portfolios?

Does gold hedge inflation?

Contrary to popular belief, the data clearly shows that gold’s track record as an inflation hedge is spotty

Nor has it been a reliable store of value.

Exhibit 2: Gold versus inflation by decade, 1980-20191

Consider the early 1980s. If ever there was a classic textbook case for owning gold, it was then. Inflation peaked at 12.4% in 1980. For the decade of the 1980s, inflation averaged 5.1% annually. Yet gold returned -3.32% annually from 1980-1989. When an inflation hedge was needed most, gold underperformed by nearly 8.5% per year for the decade; an investor buying gold at the end of 1979 saw its value decline nearly 30% by the end of 1989.