Gold and gold mining stocks are failing as a hedge against inflation
How does one combat inflation? That is the question every investor is asking right now as the spectre of rising prices looms the world over.
Historically speaking, gold is supposed to be the best hedge. However, its recent track record has been patchy at best.
While the price of gold should be rising amid some of the highest periods of inflation in US history, the precious metal is yielding a negative return for investors.
Greatest asset inflation in decades and gold went from $1500 to $1750. Literally been one of the worst possible stores of value.— Ledgerverse 🇺🇸 Prometheus of the Plebs (@ledgerstatus) October 12, 2021
Experts, including Amy Arnott, a portfolio strategist at Morningstar, are suggesting that investors should look elsewhere.
“Gold is really not a perfect hedge,” Arnott told CNBC, adding that “there’s no guarantee if there’s a spike in inflation, gold will also generate above-average returns”.
Having said that, gold is up on Tuesday as concerns over inflation dampened investors’ mood for risk-taking.
Gold price sees double-digit jump as IMF cuts global growth outlook, cites 'dangerous divergence in economic prospects' https://t.co/brSU14T92b #kitconews #gold #silver #mining #metals #economics #investing #finance— Kitco NEWS (@KitcoNewsNOW) October 12, 2021
Looking back over the 20th century, gold’s performance has been mixed during periods of high inflation.
Between 1980 and 1984, gold investors lost on average 10% while the average rate of inflation reached as high as 6.5%.
A few years down the line, between 1988 and 1991, when inflation was at 4.6%, gold returned a loss of 7.6%.
The US, (4th) #Inflation Wave 1896-(June) 2021— The Economic LongWave (@TheELongWave) July 13, 2021
1. The medieval Inflation Wave 1200-1500
2. The 16th Century Wave (Italian Renaissance) 1500-1650
3. The 18th Centruy Wave (The enlightenment) 1650-1896
4. The 20th Century Price Revolution 1896-2021#deflation pic.twitter.com/1tTwvslxqY
On the other hand, when gold effectively acted as a hedge against inflation, it did so in spectacular fashion. Between 1973 and 1979, when the average inflation rate soared to 8.8%, gold yielded a return of 35%.
With its patchy recent record, in addition to the emergence of Bitcoin, this highlights the risks of using gold as a hedge against inflation over the coming months. However, inflation might get so bad that there is room for both.
Gold mining stocks have fared similarly to the precious metal, trading at yearly lows in recent weeks.
III) Gold Mining Stocks:-— Pvot (@pvotofficial) October 12, 2021
- companies that specialize in mining and refining gold
- Will make higher revenue from rising gold prices
- Can potentially make higher returns than gold itself during bull runs
- Diversifies stock portfolio [4/n]
The strength of the US dollar, as well as rising Treasury yields have resulted in a bearish outlook for gold mining stocks, such as Barrick Newmont and Kinross.
This may change if the Fed implements more dovish policies, which could drive the price of gold higher and cause a rush by investors to gold mining stocks.