Gold as an Inflation Hedge: What the Past 50 Years Teaches Us
And what the future of gold looks like.
And what the future of gold looks like.
On a Sunday evening 50 years ago—on Aug. 15, 1971, to be exact—then-President Nixon interrupted “Bonanza,” one of the most popular TV shows of that era, to announce that he was ending the convertibility of the U.S. dollar into gold. Many consider it to be one of the most consequential decisions he made.
Up until this “closing of the gold window,” foreign central banks had been able to convert U.S. dollars into gold bullion at the fixed price of $35 an ounce. In theory, this had imposed a strict monetary discipline on the Federal Reserve, since inflating the money supply could have caused a run on Fort Knox, where the U.S. stored its supply of gold. And inflation did indeed jump in the years following Nixon’s decision to remove that restraint. So did the price of gold, which today is 50 times as high as it was that day.
This apparent correlation between gold and inflation has led many to believe that gold is a good inflation hedge. This belief isn’t supported by the data, however. If gold were a good and consistent hedge, the ratio of its price to the consumer-price index would have been relatively steady over the years. But that hasn’t been the case, as you can see from the accompanying chart: Over the past 50 years, the ratio has fluctuated from a low of 1.0 to a high of 8.4.
Gold is only a good inflation hedge over time frames far longer than any of our investment horizons, according to research conducted by Duke University professor Campbell Harvey and Claude Erb, a former commodities portfolio manager at TCW Group. They found that it’s only when measured over very long periods—a century or more—that gold has done a relatively good job maintaining its purchasing power. Over shorter periods its real, or inflation-adjusted, price fluctuates no less than that of any other asset.
Gold’s weakness as an inflation hedge may be even more pronounced today, Prof. Harvey says, because “gold is currently very expensive compared to its history.” The current gold-to-CPI ratio stands at 6.7, for example, nearly double its 50-year average of 3.6.
Even though the price of gold is 50 times as high as in 1971, stocks have performed even better. The S&P 500 has produced an annualized return of 11.2% since August 1971, assuming dividends were reinvested along the way. That compares with 8.2% annualized for gold.
Furthermore, the only reason gold came even this close to matching stocks over the past 50 years was its huge return during the first decade following Nixon’s announcement. Take away that decade, and gold has lagged behind even intermediate-term Treasury notes. Over the past 40 years, gold has risen at a 3.6% annualized rate, compared with 12.2% for the S&P 500 and 8.2% for the Treasurys.
This doesn’t mean gold has no role to play in a diversified portfolio, however, even assuming the future will be like the past. Because the correlation of its returns with those of either equities or bonds has often been low or even negative, its presence in a portfolio can reduce volatility. Over the past 50 years, a stock-and-bond portfolio could have improved its risk-adjusted performance by adding a small allocation to gold—around 5% or so.
Still, even gold’s volatility-reducing potential isn’t guaranteed, since gold’s correlation with stocks has varied widely over the years. In fact, there have been occasions in which gold’s correlation to the stock market has been positive, which is just the opposite of what it should be to reduce a portfolio’s risk. One such recent occasion came during the stock market’s waterfall decline in February and March last year: Stocks of gold-mining shares dropped 39%, as measured by VanEck Vectors Gold Miners ETF (GDX)—even more than the 34% drop in the S&P 500. “What kind of safe haven is that?” Prof. Harvey asks.
Gold’s inconsistent correlation with both stocks and inflation makes it difficult to project how it will perform over the next 50 years. An additional wild card, according to Prof. Harvey, is that gold now faces “competition it’s never had before” because of the advent of cryptocurrencies.
It is always possible that gold will be a more consistent inflation hedge in coming years. It’s just that you will have to look elsewhere than history to find support for such a possibility. Mr. Erb is cynical whether this will pose much of an obstacle to gold’s true believers, however: “The past can always be brushed aside when dreaming about how gold and inflation might move in tandem in the future.”
This stylish family home combines a classic palette and finishes with a flexible floorplan
Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.
The monthly consumer-price index indicator rose 3.4% in the 12 months to February
SYDNEY—Australia’s monthly inflation indicator came in below expectations in February, signalling that price pressures would likely continue to retreat over coming months.
The monthly consumer-price index indicator rose 3.4% in the 12 months to February, according to the latest data from the Australian Bureau of Statistics. Economists had expected a rise in February of 3.5% on year.
Some economists had expected the monthly CPI update to show a bigger rise, fuelled by services inflation which remains an area of concern for the Reserve Bank of Australia.
The better-than-expected inflation outcome will also help offset some of the uncertainty about the outlook for interest rates that arose in financial markets following news last week of a sharp drop in unemployment in February.
The most significant contributors to the February annual increase were housing costs, which climbed 4.6% on year, while food and nonalcoholic beverages rose 3.6% in the same period.
Alcohol and tobacco prices were up 6.1% and insurance and financial services rose 8.4%, the ABS said Wednesday.
Excluding volatile items from the data, the annual CPI rise in February was 3.9%, down from 4.1% in January.
Annual inflation excluding volatile items has continued to slow over the last 14 months from a high of 7.2% in December 2022, the ABS said.
Rents increased 7.6% for the year to February, up from 7.4% in January, reflecting a tight rental market and low vacancy rates across the country.
New dwelling prices rose 4.9% over the year with builders passing through higher costs for labor and materials. Annual new dwelling price increases have been around the 5% mark the past six months, the data showed.
The 3.6% rise in food prices in the 12 months to February was down from the 4.4% in January. It was the lowest annual growth since January 2022.
Insurance costs jumped 16.5% over the past 12 months to February, with rises in premiums across all insurance types due to higher reinsurance, natural disaster and claim costs, the ABS said.
This stylish family home combines a classic palette and finishes with a flexible floorplan
Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.