Key Takeaways
Despite what you may have heard, gold has had a mixed track record as an inflation hedge.
During recessions, gold has outperformed stocks and bonds about half the time.
Gold prices tend to spike when a new crisis emerges (but return to equilibrium fairly quickly).
A globally diversified portfolio can enable you to hedge inflation and market volatility with less stress and currency risk than precious metals.
Recently a number of clients have asked me if it makes sense to buy gold in today’s era of high inflation, recession fears, a strong U.S. dollar and a bear market in stocks and bonds. Generally, I tell them the answer is no, unless they are superb market timers or omniscient economists. That’s because there are better ways to hedge against inflation, currency risk and sluggish stock and bond prices in the U.S. More on that in a minute.
But when people are listening to all Doomsday podcasts and TV money shows all day long, they get anxious to find a “safe” haven for their money.
Conventional wisdom is that gold is a hedge against inflation since it is tangible, has a long history as a stable medium of exchange and has real-world uses in jewelry and electronics. Unlike fiat currencies, there’s is a relatively limited supply of gold, so theoretically there’s always a demand for it. Just keep in mind that gold has had a mixed track record as an inflation hedge. Whether investing in gold bars, gold funds or gold ETFs, research shows gold doesn’t perform any better long-term than a globally diversified portfolio does.
Gold might provide you with a short-term feeling of safety, but it’s not something we recommend in a long-term portfolio unless you want to have a little bit of “play money” for speculation. True, gold is only down about 6% so far this year, compared to minus 24% for the broader Russell 3000 index.
But you widen your lens and look at gold’s performance since the bottom of the Great Recession (March 2009), when people had many of the same fears they have today. You will see that gold has appreciated about 90%, but the broad U.S. stock market (Russell 3000) is up about 402% over the same time period. Also note that if you purchased gold at its peak in March, you would be down almost 20% as of today.
In fact, gold only outperforms the broader markets half the time during recessionary periods (see chart below).
At Novi, we focus on long-term investing. Our globally diversified portfolios are constructed to handle inflation. We plan for periods of extreme market volatility, dollar fluctuations and interest rate swings. To make your “gold play” a consistent winner over the long term, you would have to know exactly when our economy is entering a recession and exactly when it is coming out of recession. Gold prices often spike during the early days of a crisis or uncertainty. For instance, gold reached an all-time high of nearly $2,075 in 2020 as the COVID-19 pandemic spread, and it spiked again above $2,000 per ounce during the Russia-Ukraine conflict. We saw the same thing during 9/11 and the early days of the Iraqi War– but gold prices tend to come back to earth (about $1,700 per ounce now ) as the markets and economy digests each crisis.
Also, ask yourself how much gold you will need to buy at roughly $1,700 per ounce so that it sufficiently hedges against the devaluation of the U.S. dollar? If the dollar completely imploded, your gold bars would be worthless except for barter. So then how much gold would you need? Also remember that transaction costs for gold can be much higher than they are for low-cost index funds or conventional stocks in a brokerage account. Transaction costs need to be factored into your overall ROI analysis.
Now, let’s look at the strong U.S. dollar. While a strong dollar seems good for consumers since it makes imported goods less expensive, it is not good for U.S. companies (i.e., stocks) that operate overseas. A strong dollar makes their goods more expensive — and therefore less competitive in foreign markets which hurts their profits (and ultimately their stock price). Then when these corporations convert their foreign sales back into dollars, the strong dollar results in further dampened profits.
Again, we’re strong advocates of a globally diversified portfolio. So, when we invest in equities for our clients internationally, we don’t hedge the local currency. If the value of the U.S. dollar decreases, that can make things more profitable for international companies. But now, with the dollar so strong, the international side of our clients’ portfolio are off a bit. But, as soon as the dollar declines, the international side of client’s portfolios will reduce volatility on the downside.
Bottom line: globally diversified stocks remain the best way to say ahead of inflation long-term.
Conclusion
If you or someone close to you has concerns about your portfolio’s ability to withstand inflation and currency fluctuations, please don’t hesitate to reach out. We’re very experienced in this area and happy to help.
DAN SATZ MS, CFP® is a Wealth Manager at Novi Wealth