Gold Fails The Inflation Test In 2021

Were you one of those people wondering whether you should invest in gold in 2021 to hedge your portfolio against rising prices?

If so, be glad you didn’t.

Has gold lost its luster as an inflation hedge?

We’ve been asked about buying gold so many times by clients that we posted a blog article on the topic last summer.

For many years, gold has enjoyed a reputation as a successful inflation-fighter and tool to preserve purchasing power and protect your portfolio from rising prices. However, as we noted in last July’s blog article, that glittering reputation (sorry, can’t resist the pun!) is no longer merited.

Check out our July 2021 blog story: “Does Gold Really Hedge Inflation?”  

Gold proved to be no match for inflation in 2021, ending the year with its biggest loss since 2015, dropping roughly 3.5% in value for the year and down over 10% from its 2020 high.

The price of gold couldn’t stand up to rising inflation in 2021. And since unlike stocks and bonds, gold pays no income, it tends to lag even more when interest rates rise, or threaten to rise, like they are doing now. Put that all together, and it adds up to a losing investment performance in 2021.

Meanwhile, top commodity returns were percolating elsewhere

Commodities, like precious metals, food and agriculture products, and natural resources like oil, do tend to perk up in inflationary environments (sorry, more puns!).

And while gold dropped the ball, one other commodity took the top prize for the highest investment returns in 2021.

So what would have been a smart commodity to own in 2021? Hint: Think Dunkin’ Donuts or Starbucks.

If you guessed coffee, you’re right. The top performing commodity in 2021 was coffee, up over 76% in price for the year.

Coffee prices hit a 10-year high in 2021, rising more than any other commodity, reports Fortune, fueled by skyrocketing COVID-induced shipping costs, a spike in demand, and adverse weather conditions in coffee-growing countries across the globe. Who saw that one coming?

So if gold can’t protect you, what can?

So if gold doesn’t do the trick, and predicting commodity prices requires superhuman forecasting skills, what can help investors preserve their purchasing power -and actually increase their wealth – even when faced with record inflation?

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 the past four decades, and in 2021 as well. Over that time, 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.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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