Stuart Simonsen from Billings, MT is an investment strategist in the financial sector. In the following article, Stu Simonsen discusses if gold is the right investment opportunity to protect oneself during periods of inflation, and recession in the market.
From jewelry to electronics to wealth assets, gold has been a valuable resource for thousands of years. Dissimilar to fiat currencies, there is a somewhat limited gold supply, causing many to consider it a haven for hedging against inflation.
And while that’s the general consensus among investors and the general population, the reality is that gold hasn’t been consistent as a good inflation hedge explains Stu Simonsen.
Gold’s Track Record as a Hedge Against Inflation
The middle of last year saw US inflation reach heights unseen since the 1970s and early 1980s. Analysts look back at this period to offer insight into why many investors believe gold is a reliable hedge against inflation.
Stuart Simonsen from Billings, MT says that from 1973 to 1979, energy shortages and oil prices sent shockwaves through consumers, and induced skyrocketing inflation to roughly 8.8%. Across those six years, the majority of investors turned to gold as an inflation hedge due to its hefty 35% annualized returns.
But since then, gold’s performance hasn’t been as sunny reports Stu Simonsen.
When 1980 rolled around, the average annual inflation settled at 6.5%, but gold prices dropped by 10% year-over-year until 1984. Not only did returns fall short, but the yellow metal underperformed the S&P 500, real estate, and commodities.
Reports show that from 1988 to 1991, the annual inflation average decreased to 4.6%, with gold falling roughly 7.6% per year.
Helpful hedges against inflation would usually increase in value in response to a sharp spike in consumer prices. However, in the most recent extremes experienced in the US, gold hasn’t given investors the returns they were anticipating.
Using Gold as An Inflation Hedge Today
As many savvy investors will know, historical figures don’t necessarily predict future performance. And experts encourage new investors to take this to heart as they consider using gold as an inflation hedge today says Stu Simonsen.
The consumer price index, a measure of US inflation, displayed a year-over-year gain of 4.2% in April 2021, representing the first annualized increase of over 4% since the 2008 recession. And, as most consumers know, the average has increased to roughly 6% since then.
Stuart Simonsen from Billings, MT says that over the same period, the yellow metal has experienced an average annual growth of a mere 1% — not quite the performance investors were hoping for.
According to many wealth management advisors, such weak performance highlights gold’s shortcomings against an inflated market.
Stuart Simonsen mentions that gold prices have been trading sideways to down for roughly two years, even while inflation touched the sky.
In contrast, some research suggests that gold can be a good bet if used correctly. However, there’s a catch — it works only over an incredibly long term.
Across shorter timeframes, researchers discovered that the gold’s inflation-adjusted price varies wildly. Yet, if it were more reliable, as it’s long been considered, the value would be consistent relative to the consumer price index.
Inflation Hedge Comparison: Gold VS Bitcoin
Stu Simonsen says that gold hasn’t provided recent inflation protection. However, it’s outperformed another popular so-called inflation hedges in cryptocurrency – Bitcoin specifically.
Many avid crypto investors argue that digital currencies are the best wealth protection because supplies are fixed. While banks around the world can increase the supply of money, the total amount of Bitcoin is capped explains Stu Simonsen.
Despite many dubbing the coin “digital gold,” its recent performance has been diabolical, with prices plummeting year-over-year by 47% since inflation began to ramp up in 2021.
Gold Proves Inconsistent as An Inflation Hedge, But It Has Its Benefits
Stuart Simonsen reports that gold isn’t a consistent inflationary hedge, but there are benefits to holding a small amount. In the past, it’s had a negative or low correlation to stocks and bonds, making it an excellent tool for portfolio diversification.
During the COVID-19 pandemic, gold prices dropped a mere 0.1%, while the S&P 500 took a hit of 23%.
On top of that, the demand for gold in investment portfolios is growing, as per reports from the World Gold Council. In the first half of 2022, the worldwide demand raised to 12% year over year.
So, although it may not be the most profitable gain during inflationary periods, holding gold remains an important portfolio component.