Gold: Don’t Buy the Hype – ValueWalk Premium
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Gold: Don’t Buy the Hype

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Q2 2020 hedge fund letters, conferences and more

The number of coronavirus cases in the United States has eclipsed five million and the U.S. economy is mired in its deepest recession since the end of World War II. To combat the crisis, Congress passed the largest fiscal stimulus package in history and is in the later stages of negotiating another round. Preliminary estimates put the total price tag of already enacted stimulus somewhere in the neighborhood of $6 trillion dollars.

That’s twelve zeros.

In response to this unprecedented fiscal stimulus, investors have turned to perceived “safe havens”, specifically gold, to hedge their portfolios against the prospect of runaway inflation. But does history support this belief? And what should advisors be thinking about for client portfolios?

Does gold hedge inflation?

Contrary to popular belief, the data clearly shows that gold’s track record as an inflation hedge is spotty

Nor has it been a reliable store of value.

Exhibit 2: Gold versus inflation by decade, 1980-20191


Consider the early 1980s. If ever there was a classic textbook case for owning gold, it was then. Inflation peaked at 12.4% in 1980. For the decade of the 1980s, inflation averaged 5.1% annually. Yet gold returned -3.32% annually from 1980-1989. When an inflation hedge was needed most, gold underperformed by nearly 8.5% per year for the decade; an investor buying gold at the end of 1979 saw its value decline nearly 30% by the end of 1989.

And things didn’t get any better during the 1990s

Gold’s decline continued, underperforming inflation by 5% annually from 1990-1999. It wasn’t until the mid-2000s that gold finally began to catch up and deliver positive returns to investors; it would take 26 years – until January 2006 – for investors buying gold at the end of 1979 to see a positive return on their investment.

Exhibit 3: Gold versus inflation: 1980-20192


Consider the global financial crisis, when gold delivered the best returns in our 40-year sample period. Let’s assume an investor timed it perfectly and invested in gold in early 2008, just as the crisis began to unfold but before the Fed began to dramatically expand its balance sheet. For the five-year period from 2008-2012, gold returned a staggering 14.94% annually while inflation averaged just 1.80%.

Does this cherry-picked, five-year time horizon from 2008-2012 make the case for gold as an inflation hedge? Only if we ignore gold’s track record both before and after that window. Upon closer examination, the 10-year period from 2008-2017 includes two very different experiences for gold investors: While gold returned a staggering 14.94% from 2008-2012, gold returned a pitiful -4.85% annually from 2013-2017. Subsequently, if an investor was late to the game and added gold at the end of 2012 (but before the most aggressive QE), their returns were considerably worse for the remainder of our crisis period.

Read the full article here by Donald Calcagni, Advisor Perspectives

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