Gold as an inflation hedge: What the past 50 years teaches us

Wall Street Journal/Mark Hulbert

Repost from 8-9-2021

graphic image showing inflation, gold, commodity upticks

USAGOLD note: Whenever inflation looms on the horizon, research inevitably surfaces arguing that gold is not a reliable inflation hedge. This Wall Street Journal article published over the weekend is another example. It draws on the research of 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,” writes columnist Mark Hulbert, “that gold has done a relatively good job maintaining its purchasing power. Over shorter periods its real, or inflation-adjusted, the price fluctuates no less than that of any other asset.” Though that might be the case, It is difficult, in fact, impossible, to argue against gold’s performance as an inflation hedge during the 1970s – the last time we had a close encounter with runaway inflation. Certainly, investors holding gold at the time did not question its reputation as a hedge while inflation was raging through the economy. Quite the opposite, they were happy they had the foresight to buy it before it became a major issue.

If you blend the data, though, over a longer period to include disinflationary economies (like the 1980s when the dollar provided a real rate of return), its performance levels out, and that is what Harvey and Erb’s do in their study. Inflation continued in the period between 1980 and 2000, but it was greatly subdued, and the Federal Reserve went to great lengths to secure a real rate of return on Treasury paper. That policy effectively boosted the dollar and brought down the gold price. Now, we have a different story. In fact, a good many believe that what Paul Volcker was to inflation in the 1980s, Jerome Powell is to disinflation in the 2020s. The inflation rate has migrated well above the rate of return on the 10-year Treasury note, and though gold has yet to respond, we are early in the game. A good many still buy into the Fed’s argument that the current inflation rate is transitory.

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