Nope, Today’s Inflation Doesn’t Call for Gold

In recent weeks, from Internet banner ads to television commercials to radio and podcast spots, we have heard a clarion call: Put your IRA in gold now to protect against inflation! We are told gold is the only insurance policy against a devaluing dollar. That converting your IRA or 401(k) to store physical gold is wise, low-cost and risk-free—seemingly ignoring that the courts have cracked down severely on the process, costing some people hundreds of thousands of dollars.^[i] Aside from the potential costs, low liquidity and other fine points, we see a giant problem with this alleged inflation hedge: It just doesn’t work.

As we now know, courtesy of December’s CPI report, US consumer prices rose 7% last year.^[ii] For something to work as an inflation hedge, it would have to rise by more than 7%. Global stocks easily fit the bill, returning 21.8% including reinvested dividends. If you are keeping score, that is three times the inflation rate, suggesting real (inflation-adjusted) returns were fine. Gold? Well, gold fell -4.3%. Yes, as the inflation rate hit a 40-year high, gold lost value in absolute terms.

Exhibit 1: Gold and Global Stocks in 2021

Source: FactSet, as of 1/14/2022. MSCI World Index return with net dividends and gold price (dollars per troy ounce), 12/31/2020 – 12/31/2021. Indexed to 100 at 12/31/2020.

Now, we aren’t arguing this is destined to repeat in 2022. We also happen to think inflation is likely to moderate later this year. That isn’t a political or ideological statement, just an opinion based on our analysis of inflation’s causes and how the calculation works. But let us be clear: Anyone selling you gold as an inflation hedge is selling you snake oil.^[iii] A reliable inflation hedge should be able to prove its power on a repeatable basis, especially at times when everyone fears inflation—as they did last year. If you can’t count on gold in that environment, when can you?