3-minute read
If you were to buy gold, would you do it from this guy?
Ehhh…
How about this guy?
Honestly, I’d prefer not to buy it at all.
Are you sure about that?
Are you sure about that?
That’s a good question. If you ask the tv salesman in the first picture, you’d be crazy not to.
What are his selling points?
Feel free to take a look for yourself here. But let’s start with the most frequently cited reason: gold is a hedge against inflation.
Quite timely I’d say. Wasn’t the last inflation reading at 8.2%?
Yes, this was preceded by readings of 8.3%, 8.5%, and the current annual peak of 9.1%.
So, gold is having a stellar year?
The price of gold is down -10%[1].
Far from stellar. Does this come as a surprise to you?
At first, it did. But then I took a look at the data:
Annualized Gold Return | Period Gold Return | Inflation Rate | |
2010s | 3.3% | 38.7% | 1.8% |
2000s | 14.3% | 280.9% | 2.6% |
1990s | -3.3% | -28.2% | 3.0% |
1980s | -2.4% | -21.6% | 5.5% |
1970s | 30.8% | 1365.4% | 7.1% |
Seems like a mixed bag.
Agreed. The 1970s are the best example in modern history where the price of gold rose far above the inflation rate. You jump to the next decade, however, and you don’t see gold hedge inflation at all.
Is looking at this by decade the best way? Aren’t you cherry picking the time frames?
True, fair point. That’s why I looked at the correlation between the price of gold and inflation. A correlation of 1 means they move in lockstep while 0 means there is no correlation.
Where does it fall?
Over approximately the last 50 years the correlation stands at 0.16.
So, the correlation isn’t strong either.
Correct.
Have you looked at gold’s return during periods of “instability around the world” as the commercial actor referenced?
I sure did. I looked at the previous four “major” wars and calculated the return of gold for the first year of each. Here are the results:
US War | Gold Return |
Vietnam* | -23.20% |
Desert Storm | 7.80% |
War in Afghanistan | 16.60% |
Iraq War | 23.90% |
Looks like there may be something to it.
It is possible. This analysis could be critiqued 3 ways to Sunday, but you can score one for the goldbugs on this selling point.
What about gold when it comes to the national debt? Isn’t that something that gets brought up?
It does – with the point being that gold is a good asset to own during periods of rising national debt. Once again, this analysis can be sliced several ways but let’s look at gold’s return after the Great Financial Crisis. This is a period that saw our debt-to-GDP ratio climb from 68% to 82% in one year. It also includes nine straight years of the debt-to-GDP ratio being 100%+.
And what did gold return over that period[2]?
It had an annualized return of 4.7%. For comparison’s sake, the S&P annualized at 6.9%.
What’d you make of that?
I’d say it doesn’t tell us much. In short, it lagged stocks but beat out bonds.
Judging by your tone, you don’t appear to be gold’s biggest proponent. Is that right?
I’m not telling anyone to rid their portfolios of gold or sell every bar in their lockbox. Gold can very well be used as a good diversifier, say around 5% of the portfolio. But spare me the tropes that it’s a great inflation hedge or a bulletproof investment. Because the data isn’t there to support it.[3]
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[1] Year-to-date return through October 31, 2022. Historical gold prices are found on https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart#:~:text=The%20series%20is%20deflated%20using,2022%20is%20%241%2C651.94%20per%20ounce
[2] January 1, 2008, through October 31, 2022.
[3] Past performance is not a guarantee of future results and it is not possible to invest directly in an index.