Gold as an inflation hedge? History suggests that this is not the case

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Gold is often advertised as a means of hedging inflation. In my head Become an investor now.

But gold hasn’t responded to hype. According to historical data, the record is uneven.

Investment to hedge inflation usually increases with the rapid rise in consumer prices. However, gold has brought negative returns to investors during some of the most recent periods of high inflation in the United States.

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According to Morningstar portfolio strategist Amy Arnot, investors concerned about rising consumer prices may want to consider other asset classes instead.

“Gold isn’t really a perfect hedge,” said Arnot, who analyzed returns for various asset classes during periods of above-average inflation.

“Even if inflation soars, there is no guarantee that gold will generate above average returns,” she said.

For example, according to Arnotts’ analysis, gold investors lost an average of 10% from 1980 to 1984, with annual inflation of about 6.5%.

(The Federal Reserve is trying to keep inflation around 2% a year.)

Similarly, gold produced a negative return of 7.6% between 1988 and 1991, with inflation at around 4.6% during this period.

However, investors made significant profits between 1973 and 1979 when the average annual inflation rate was 8.8%. Gold returned a whopping 35%.

Various records suggest that inflation-conscious investors are betting on using gold as a hedging portfolio.

According to Arnot, the correlation between gold and inflation has been relatively low over the last half century, at 0.16. (This indicator shows how closely gold and inflation are linked. Correlation 0 means irrelevant and correlation 1 means they move at the same time.)

“I’m not going to buy it just because inflation is approaching,” said Michael McClary, chief investment officer at Valmark Financial Group in Akron, Ohio.

Other inflation options

Instead, investors may consider increasing allocations to four asset classes: equities, government bond inflation protection securities (TIPS), real estate investment trusts, and commodities (such as oil) as a better inflation hedge. , Said McClary.

Consider a portfolio with 60% in equities and 40% in bonds (that is, a bond and cash equivalent investment).

In an inflation-hedged portfolio, 5% to 15% of equity buckets could be allocated to REITs and commodities, McClary said, McClary said. (Mutual funds and exchange-traded funds each make a wide range of investments.) The fixed income portion could be allocated 25% to TIPS, he said.

According to Arnott’s analysis, these asset classes have a more consistent performance than gold during the inflationary period.

Of course, consumer prices are rising in the short term, but inflation does not always have the power to sustain. Most Wall Street economists expect it to be temporary. But Deutsche Bank is out of consensus, Warned Rising inflation could be a global “time bomb.”

And investors may consider gold as a profitable asset class, despite the inflation debate. For example, supporters often think of assets as a safe haven in the event of a turmoil.

Gold proved to be resilient during the early market crash. Covid pandemic. Is S & P 500 Stock index 34% shed From the February 19 highs last year to the March 23 valley.Is SPDR Gold Shares Only 3.6% of the funds lost during the same period. (These percentages are based on market closing prices.)

Investors whose theory of investing in gold remains the same regardless of inflation should not necessarily change their allocation given the various performances, McClary said.

Gold as an inflation hedge? History suggests that this is not the case

Source link Gold as an inflation hedge? History suggests that this is not the case

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