High Inflation! Time to Hedge with Gold? – News or Noise?
The Tv and internet commercials are everywhere. They never seem to disappear whether its good times or bad. However, in times like this, when inflation is high, when stock market volatility is high, when global conditions are more uncertain than normal, and when there is doubt in the world and our economy, they explode in numbers and alarmism. What am I talking about? I am talking about the number of commercials pitching Gold as the ultimate inflation hedge.
I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” for your investment portfolio. This week’s topic is “what is gold? Is it really the inflation hedge that is advertised on TV and in newsletters?
I’m going to be as direct and blunt as possible. There is no positive correlation between gold and inflation. here wasn’t throughout the total of the 70’s and there hasn’t been for years. I’ll walk you through the cold hard facts with charts and graphs in a bit, but if you want an inflation hedge, you need to look to real estate markets or stocks in companies that can raise pricing to their customers, even if it is a lag in timing versus their costs. You will not find that characteristic in physical gold or gold mining companies.
This does not mean that gold makes a bad investment at times or that no investor should own it, but it means that it doesn’t correlate to inflation. A study published in Investors chronicle showed the correlation between gold and inflation of only .28 from 1971 to 2020. Other studies have shown the correlation over the last 50 years has been about .16. Between 1980 and 2000, the price of gold lost 40% of its value while the CPI rose over 120%. Those aren’t stats of positive correlation. Here are some other time frames for gold and inflation. CNBC
published these stats awhile back. Check it out for a moment.
And I’m going to stop you gold bulls in your tracks before you get going referencing the 1970’s, gold, and inflation. This is where my story on gold get’s good. I repeat. Gold is not an inflation hedge. It wasn’t even in the total of the 1970’s. It is a currency depreciation hedge. It’s a hedge against countries devaluing their currencies over long periods of time. Check out these four very long-term charts first of gold and then of the DXY dollar index. The first set of charts is the time of the 1970’s-90s and the second set is from the last 20 years.
The first chart of each is gold and the second is of the dollar over the same time peroid. You will see the general trends over years, not hours or days, are the dollar and gold moving in opposite directions. The dollar moves up, and gold moves down or stays flat like this year.
So, what to make of these commercials and news stories about buying gold as an inflation hedge? Don’t do it. At least don’t justify buying gold because of inflation. These stories are noise, and they are lying to you. However, if you like it for jewelry or want to hedge yourself against a long-term decline in the dollar or whatever currency you transact in? Then gold might be right for you and part of your portfolio, however you must know that it will never provide you a cash income stream to spend in your days ahead which is why investors like Warren Buffet disregard it as an investment option for his insurance portfolios
News or Noise? . . . Noise!
For retirement prospects, TV and internet commercials are everywhere. They never seem to disappear whether it's good times or bad. However, in times like this, when inflation is high, when stock market volatility is high, when global conditions are more uncertain than normal, and when there is doubt in the world and our economy, they explode in numbers and alarmism. What am I talking about? I am talking about the number of commercials pitching Gold as the ultimate inflation hedge.
