There are generally three “reasons” given when an investor wishes to buy gold: 1) It’s a hedge against inflation, 2) It’s a hedge against chaos, 3) It’s a play on a weaker dollar. A few thoughts on the validity of each….
Gold has not been a good inflation hedge. To illustrate this point here’s a chart of the Consumer Price Index (CPI), Gold, and the S&P 500 returns since 1980. Our official measure of inflation (CPI) has risen 231% since 1980. The S&P 500 has gained an astounding 2,600%. Gold is up 187%, underperforming both statistical inflation, and the S&P 500. Stocks (or real estate) have been better alternatives as an inflation hedge.
Another reason we hear investors buying gold is a hedge against uncertainty. We understand that feeling of safety that gold provides. However, the 2020 rally in gold is not due to coronavirus or U.S./China geopolitical tensions. Instead, it can be attributed to the falling dollar. More broadly, buying and storing physical gold is inefficient and the transaction costs can be exorbitant. Additionally, the likelihood that society breaks down to the point where we need gold bars to pay for goods & services is very, very unlikely.
We all know that gold is a nice portfolio diversifier over the longer term, but that’s not the spirit in which many investors are buying gold today. Instead, they are buying it for profit (i.e. they think the spot price will keep going up). If that’s the objective, then the first question an investor should ask is whether they think the dollar will keep falling, because if the answer isn’t “yes” then gains in gold are likely to be generally underwhelming, and you will take on a lot of volatility for those gains.
Talk of gold as a part of an investment portfolio is commonplace during times of political and economic uncertainty. However, it’s important to keep long-term goals in mind and make efforts to “tune out the noise”. Historically, stocks broadly outperform gold as an inflation hedge. Buying gold as a way to book short term profits does have merit, but this is a trading strategy and you would need to be supremely confident of further declines in the dollar. For the vast majority of investors with a goals-based financial plan, holding gold is not worth the additional risk and potential for long-term underperformance, when compared to equities.