Is Gold Really the Best Inflation Hedge?

By Charlie Bilello

[biiwii comment: so when touts implore you to buy gold – and they will – in the midst of the next inflation squall, you might want to disregard it as the usual gold bug pom pom waving] 

“Gold is the best hedge against inflation.” – Pundit

There’s not a week that goes by where we don’t hear one pundit or another promoting Gold as a valiant protector against inflation…

Inflation is coming, we are told, and when it does you better own Gold. Sounds wonderful in theory, but what does the evidence suggest? Let’s take a look…

Since 1975 (when Gold futures began trading), Gold has advanced 581% versus a 375% increase in the Consumer Price Index (CPI).

Case closed, then? Buy Gold to protect against inflation?

Not necessarily. You see, Gold is not the only asset class in existence. This is what that same chart looks like if we include Investment Grade Corporate Bonds, Stocks and REITs…

Note: Investment Grade Bonds = BofA Merrill Lynch US Corporate Master Total Return Index, REITs = FTSE Nareit All REITs Index (Total Return), S&P 500 Index = S&P 500 Total Return Index.

Surprise: Bonds, Stocks, and REITs have all been far superior hedges against inflation than Gold. And they’ve all done so with lower volatility than Gold.

In terms of consistency, Gold loses on that front as well. It has outpaced inflation in only 45% of rolling 5-year periods while Investment Grade Bonds have beaten inflation 86% of the time.

Then there’s that pesky 20-year period from January 1981 through December 2000 when U.S. inflation rose 102% while Gold declined 54%.

That’s not to say there aren’t times when Gold outpaces inflation. There certainly are (1977 – 1980, 2001 – 2012) and given enough time, there will be again.

But it’s a myth to say that Gold has been anything close to “the best” hedge against inflation. The evidence suggests otherwise.

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