Broker Check

The Church of Gold

December 17, 2021

Inflation is too much money chasing too few goods, and there’s a goldilocks level where just the right amount is needed for a growing economy. But when inflation spikes, investors, politicians, and most Americans that lived through the 1970s begin to panic.

I’m one of them because I vividly remember those gas lines and double-digit mortgage rates. I also remember how gold became a panacea for Americans looking to protect against inflation.

Fast forward to today, and those who continue to worship gold’s omnipotence are back on center stage proclaiming is mythical status to anyone who will listen. That’s because inflation is more than triple where it was pre-COVID, and it’s hard to see an end to rising prices anytime soon.

However, it doesn’t appear this religion is gaining more disciples. Gold is down a lot this year, despite rising inflation, and I’m guessing this predicament is testing the faith of those who have remained so loyal over the years.

True believers that have dug their heels in argue that younger generations lack the experience. They’ve never seen inflation before, and as the saying goes, the four most dangerous words in investing is, “this time it’s different.”

But could it be different this time? Consider the following.

Gold is not a real investment because it produces no revenue, cash flow, or earnings. It doesn’t pay dividends or reinvest back into itself. It’s just an asset whose price is purely based on the demand to own it and the supply available rather than the value it creates. It’s as arbitrary as the price for art, bitcoin, Faberge eggs, or Pokémon cards.

If so, why would anyone be expected to run to gold today when it has no innate ability to protect against inflation? Doing so would just be a wager that other investors are going to think the same way, and that’s a risky bet today versus the 1970s.

Back then, it hadn’t been that long since gold was the standard for our currency, and gold coins were more than just collectors’ items. Baby Boomers and the generations that preceded them grew up with gold as an integral part of their lives.

Today, gold has no utility outside of jewelry, and it’s been decades since anyone used it to pay for anything. Nobody alive other than Baby Boomers grew up with gold the same way. They’re all that’s left in the “Church of Gold.”

If anything, I’d wager that younger generations view gold as a nuisance more than a savior. It’s heavy, hard to transport, expensive to insure, and you need special tools to carve it up to pay for stuff. Not to mention asking them to find religion on something inaccessible on an iPhone is likely falling on deaf ears.

And you know what? It kills me to say this, but I agree with them. The world has changed a lot in the last half century, and along the way, gold has become little more than a shiny pet rock to most investors for good reason. It doesn’t do anything!

That’s why my inflation playbook places less emphasis on gold and more on real inflation hedges like stocks. More specifically, companies with pricing power that can pass along cost increases to customers and preserve profitability. There’s also a place for real estate with shorter-term leases (so they can reset faster) and inflation-protected bonds.

Just look at the data. Over the last 50 years, gold has been more volatile than the S&P 500 while returning only a fraction of the index’s total return. More specific to years where inflation was high (exceeding 4%), stocks not only did better, but gold’s average real return was negative.

The bottom line is that gold doesn’t shine like it used to, but don’t take it from me. Here’s what Warren Buffet, one of the greatest investors of all time, said about gold back in 1988:

“It gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”


This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.