Chart of the Week: It Isn’t Gold

Elevated inflation. War in Eastern Europe. Recession fears and a bear market. This has been a trying year for assets almost across the board. But with the aforementioned backdrop, many would—and still do^[i]—argue gold’s merits. They claim it hedges chaos, inflation and equity risk. But there is an inconvenient truth: Gold hasn’t been spared from this year’s downturn, and a cold look at the facts should show you theories of its hedging powers are pure, 24-carat myths.

Consider our Chart of the Week, which shows you gold’s performance this year, overlaid with a few key events. You will no doubt see it began the year well, rising 12.9% through March 8’s high. That was the day the West unveiled sweeping sanctions, including UK and US plans to cease importing Russian energy products.

Exhibit 1: Gold in 2022

Source: FactSet, as of 10/27/2022.

But since then, gold has slid -18.3%, far worse than global stocks’ -8.3%.^[ii] Loads of people say this is because of Fed hikes and the strong dollar, but that logic makes little sense, in our view: The dollar is usually strong when stocks are weak (it, too, is a reputed “safe haven”) and interest rates normally rise with inflation. The idea of gold hedging inflation if rates don’t rise and against weak stocks if the dollar is also weak is a pretty specific sort of hedge indeed.

What that actually shows you, in our view, is this: Gold isn’t a hedge. Not against inflation, stock weakness or war. It is a commodity like pork bellies, and it will trade on supply and demand for it. The drivers of that demand are a lot less predictable than simply saying “it is a hedge.”