Is Gold an Effective Inflation Hedge?
When it comes to hedging inflation, gold is a complex asset with a complicated relationship. While empirically, gold does not consistently hedge inflation, its value as a diversifier in a portfolio cannot be dismissed outright.
The Gold Rush
Recent surges in gold prices have raised interest in its potential as a portfolio diversifier and an inflation hedge. The real (Consumer Price Index-deflated) price of gold reached nearly $740 per ounce in April 2024, marking its highest level since July of 2020. However, this is still below its peak in the early 1980s. (See Exhibit 1)
This surge in gold prices has sparked a debate about its inflation-hedging properties. In this blog post, I delve into the visual and empirical evidence regarding gold’s role as an inflation hedge. For detailed results and R code, refer to the online R supplement.
What Makes a Good Inflation Hedge?
An ideal inflation hedge should move in tandem with inflation. However, a scatterplot analysis (Exhibit 2) of gold prices versus headline inflation changes shows no clear correlation between the two. The relationship between gold prices and inflation is inconsistent and varies over time.
Similarly, testing gold’s response to underlying inflation using a median PCE measure also reveals a lack of significant relationship between the two variables (Exhibit 4). Gold’s volatility in response to inflationary pressures further complicates its role as an inflation hedge.
Conclusion
While gold may hedge inflation in certain circumstances, its inconsistent and unstable relationship with inflation makes blanket claims about its effectiveness risky. Just as bonds do not always hedge stocks, gold’s role as an inflation hedge should be viewed with caution. Diversification remains key in portfolio construction, and gold can play a valuable role in that regard.
The author’s views are independent and do not constitute solicitation or advice from Armstrong Advisory Group. While sourced from reliable information, accuracy is not guaranteed. This is not an offer to trade securities.