Broker Check

The Church of Gold

September 23, 2022

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 panic for good reason. It’s also when gold's most loyal admirers stand up and proclaim its mythical status to anyone who will listen.

That’s precisely what happened a year ago. The Federal Reserve had finally started to realize that inflation was not transitory, and “The Church of Gold” took center stage to proclaim the shiny metal’s omnipotence. Their sermon was simple. The last time inflation soared, gold rewarded its most faithful parishioners, and it was about to do it again.

Fast forward to today, and it doesn’t appear that gold has gained many more disciples. Despite the highest inflation since the 1970s, gold is down close to 8% this year1. Over the last six months, it’s down 14% for the longest losing streak in four years1. Those are big moves in an asset that’s supposed to be a haven.

True believers that have dug their heels in argue that younger generations lack perspective. They weren’t alive the last time gas lines and double-digit mortgages were the norm. They’re not aware that the four most dangerous words in investing are, “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 that’s 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, Faberge eggs, sneakers, 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 the U.S. dollar, 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 practically 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.

I’d even 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. There’s also another “store of value” these days called bitcoin, and unlike gold, cryptocurrencies can be accessed on an iPhone.

Simply put, the world has changed a lot since the 1970s, and along the way, it’s likely that the perceived value and utility of gold has diminished. If so, this time really could be different.

The bottom line

There’s little evidence to suggest that gold is an effective inflation hedge or a long-term wealth creator. 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 return1. More specific to years where inflation was high (exceeding 4%), the table below shows that stocks not only did better, but gold’s average real return was negative.


To be clear, I’m not saying that gold has an inverse or opposite relationship to inflation, but rather that there’s very little relationship at all. I’d wager the weakness in gold this year has more to do with the strength of the U.S. dollar than anything else. For example, the euro has fallen over 15% relative to the USD over the past year. That’s made buying gold way more expensive for Europeans because gold is priced in USD (just like oil, natural gas, and nearly every other commodity on the planet).

Furthermore, since gold does not pay any income, it’s likely being passed over for assets like U.S. Treasury bonds that now pay risk-free income at levels unseen in 15 years. It’s hard to compete with that.

But does this imply that gold is a bad investment? If it can’t hedge inflation properly or be used to buy stuff, should gold bugs become atheists and sell all their gold? Not necessarily.

We continue to own gold in many of our strategies because it has historically been a good diversifier to stocks and bonds. This year is a great example. Sure, gold is down almost 8%, but the S&P 500 and bond market are down 21% and 14% respectively. The trick is to not overdo it, and while every investor is different, it’s hard to think of a reason to exceed 10% of investible assets.

The bottom line is that gold may not shine like it used to, but it’s still a valuable component to a diversified portfolio. Just be sure to keep realistic expectations of what it can and cannot do.





1 Bloomberg. As of 9/21/2022



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.