Does Gold Really Hedge Inflation?

It’s not your imagination. Prices are going up.

You may have heard that inflation numbers came in hotter than expected last month. The Federal Reserve maintains that inflation is “transitory,” meaning it concedes that prices are going up as the economy rebounds after COVID, but does not believe that those price hikes will be repeated or lasting. Nevertheless, inflation is on everyone’s mind.

One of the most common questions we get from clients is whether gold is a good hedge against inflation.

Mercer Advisors Chief Investment Officer Donald Calcagni, CFP®, MST, tackles that question in a video recently posted on the Mercer Advisors website.

He examines gold’s long-term record to see if it can protect you by serving as a reliable store of value and effective hedge against rising prices.

How did gold do 1980-2020?

Don starts back in 1980, when inflation nearly topped 15%. Remember those days? If ever investors needed protection from inflation, it was then.

Fast forward forty years, to 2020. Over those four decades, gold failed to keep ahead of inflation, and spent much of the period lagging other investments and investor’s high expectations. For the first twenty-five years, in fact, gold lost money for investors, not even breaking even until almost 2010. It recovered and posted positive returns during the Great Financial Crisis, but then subsequently lost over a third of its value as the Fed pumped money into the economy and markets rebounded.

Can gold protect you from inflation?

The conclusion? While many investors may like to keep a small slice of gold or other precious metals in their portfolio, gold is not effective on a larger scale as a reliable hedge against inflation, and entails more price volatility than most investors can stomach.

Recent research by investment data firm Morningstar, reported on CNBC, came to the same conclusion. “Gold yielded a negative return for investors during some of the highest recent inflationary periods in the U.S.,” they summarized. Remember as well that investments in gold do not pay a regular dividend or that periodic income that most investors need and expect.

One final observation? It’s worth noting that as inflation pressures have been building up in recent months, gold itself has lost value year-to-date, showing once again that it does not necessarily offer the best solution to combat inflation.

If gold can’t protect you, what can?

So if gold doesn’t do the trick, what might have helped investors preserve their purchasing power over those four decades from 1980 to 2020, and actually increase their wealth?

The best answer? Holding a healthy dose of stocks and other assets within a diversified portfolio would have helped investors stay ahead of inflation. Over those four decades, and despite the ups-and-downs along the way, stocks grew much faster than inflation and would have left investors well ahead of where they started.

Want to learn more about Don’s take on gold and inflation? You can watch his video here.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.