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Last post 2 years ago by RayR. 17 replies replies.
Gold as an Inflation Hedge: What the Past 50 Years Teaches Us
rfenst Offline
#1 Posted:
Joined: 06-23-2007
Posts: 39,096
On the anniversary of the metal’s unleashing by Nixon, gold’s believers may be disappointed by the record

WSJ

On a Sunday evening 50 years ago—on Aug. 15, 1971, to be exact—then-President Nixon interrupted “Bonanza,” one of the most popular TV shows of that era, to announce that he was ending the convertibility of the U.S. dollar into gold. Many consider it to be one of the most consequential decisions he made.

Up until this “closing of the gold window,” foreign central banks had been able to convert U.S. dollars into gold bullion at the fixed price of $35 an ounce. In theory, this had imposed a strict monetary discipline on the Federal Reserve, since inflating the money supply could have caused a run on Fort Knox, where the U.S. stored its supply of gold. And inflation did indeed jump in the years following Nixon’s decision to remove that restraint. So did the price of gold, which today is 50 times as high as it was that day.

This apparent correlation between gold and inflation has led many to believe that gold is a good inflation hedge. This belief isn’t supported by the data, however. If gold were a good and consistent hedge, the ratio of its price to the consumer-price index would have been relatively steady over the years. But that hasn’t been the case, as you can see from the accompanying chart: Over the past 50 years, the ratio has fluctuated from a low of 1.0 to a high of 8.4.

Gold is only a good inflation hedge over time frames far longer than any of our investment horizons, according to research conducted by Duke University professor Campbell Harvey and Claude Erb, a former commodities portfolio manager at TCW Group. They found that it’s only when measured over very long periods—a century or more—that gold has done a relatively good job maintaining its purchasing power. Over shorter periods its real, or inflation-adjusted, price fluctuates no less than that of any other asset.

Bullion’s performance over the past 50 years relative to stocks, bonds and inflation
Even though the price of gold is 50 times as high as in 1971, stocks have performed even better. The S&P 500 has produced an annualized return of 11.2% since August 1971, assuming dividends were reinvested along the way. That compares with 8.2% annualized for gold.

Furthermore, the only reason gold came even this close to matching stocks over the past 50 years was its huge return during the first decade following Nixon’s announcement. Take away that decade, and gold has lagged behind even intermediate-term Treasury notes. Over the past 40 years, gold has risen at a 3.6% annualized rate, compared with 12.2% for the S&P 500 and 8.2% for the Treasurys.

This doesn’t mean gold has no role to play in a diversified portfolio, however, even assuming the future will be like the past. Because the correlation of its returns with those of either equities or bonds has often been low or even negative, its presence in a portfolio can reduce volatility. Over the past 50 years, a stock-and-bond portfolio could have improved its risk-adjusted performance by adding a small allocation to gold—around 5% or so.

Still, even gold’s volatility-reducing potential isn’t guaranteed, since gold’s correlation with stocks has varied widely over the years. In fact, there have been occasions in which gold’s correlation to the stock market has been positive, which is just the opposite of what it should be to reduce a portfolio’s risk. One such recent occasion came during the stock market’s waterfall decline in February and March last year: Stocks of gold-mining shares dropped 39%, as measured by VanEck Vectors Gold Miners GDX +2.05% ETF (GDX)—even more than the 34% drop in the S&P 500. “What kind of safe haven is that?” Prof. Harvey asks.

The next 50 years
Gold’s inconsistent correlation with both stocks and inflation makes it difficult to project how it will perform over the next 50 years. An additional wild card, according to Prof. Harvey, is that gold now faces “competition it’s never had before” because of the advent of cryptocurrencies.

It is always possible that gold will be a more consistent inflation hedge in coming years. It’s just that you will have to look elsewhere than history to find support for such a possibility. Mr. Erb is cynical whether this will pose much of an obstacle to gold’s true believers, however: “The past can always be brushed aside when dreaming about how gold and inflation might move in tandem in the future.”
gummy jones Offline
#2 Posted:
Joined: 07-06-2015
Posts: 7,969
Yep

No more than 5 to 10 percent (max) of portfolio unless you want the indexes to leave your portfolio in the dust
zitotczito Offline
#3 Posted:
Joined: 08-21-2006
Posts: 6,441
I jump in and out of gold and silver all the time. I got .37 cents last month on my 40000.00 emergency fund so I make it up here.
RayR Offline
#4 Posted:
Joined: 07-20-2020
Posts: 8,793
There's a caveat, the world is in uncharted territory as Biden destroys America and the buying power of the dollar, as the administration is on an unprecedented welfare-state spending spree in a vain attempt to whitewash the economic destruction caused by ruinous government policies. There is nothing in the past that exactly correlates to today, in fact, things may be headed to a new dystopian world. The world could very well experience in our lifetime the end of another failed experiment of unlimited debt creation and fake fiat money and then what?
zitotczito Offline
#5 Posted:
Joined: 08-21-2006
Posts: 6,441
"...and then what?"

Have you looked at my avatar, that's what.
RayR Offline
#6 Posted:
Joined: 07-20-2020
Posts: 8,793
zitotczito wrote:
"...and then what?"

Have you looked at my avatar, that's what.


Ah yes, bullets are a fungible commodity too.
Abrignac Offline
#7 Posted:
Joined: 02-24-2012
Posts: 17,216
In my opinion gold is one of the stupidest medium to long term plays. It’s much to volatile. Unless, you can correctly predict (very few can) the market you will forgo superior earnings for extreme volatility.
RayR Offline
#8 Posted:
Joined: 07-20-2020
Posts: 8,793
What will earning be worth after inflation tanks the dollar?

Professor Emeritus of Economics at UNLV Hans-Hermann Hoppe just wrote this piece about how the fiat monetary system would work for you if you were the state, the central bank, and those closely connected.

Quote:
Imagine you are in command of the state, defined as an institution that possesses a territorial monopoly of ultimate decision making in every case of conflict, including conflicts involving the state and its agents itself, and, by implication, the right to tax, i.e., to unilaterally determine the price that your subjects must pay you to perform the task of ultimate decision making.

To act under these constraints — or rather, lack of constraints — is what constitutes politics and political action, and it should be clear from the outset that politics, then, by its very nature, always means mischief. Not from your point of view, of course, but mischief from the point of view of those subject to your rule as ultimate judge. Predictably, you will use your position to enrich yourself at other people's expense.

More specifically, we can predict in particular what your attitude and policy vis-à-vis money and banking will be.

Continued...

https://mises.org/library/why-state-demands-control-money
Mr. Jones Offline
#9 Posted:
Joined: 06-12-2005
Posts: 19,357
I bought gold big-time in 1989 over in Germany...after a 300 kilo H delivery ...
It's in a swiss BANK acct ...
Feds never found it...

Bwuhahahahaha!!!

Get to know me.
ZRX1200 Offline
#10 Posted:
Joined: 07-08-2007
Posts: 60,473
Stocks are never worth zero and gold has been.


What?
HockeyDad Offline
#11 Posted:
Joined: 09-20-2000
Posts: 46,063
Mr. Jones wrote:
I bought gold big-time in 1989 over in Germany...after a 300 kilo H delivery ...
It's in a swiss BANK acct ...
Feds never found it...

Bwuhahahahaha!!!

Get to know me.


Oh they found it.
Mr. Jones Offline
#12 Posted:
Joined: 06-12-2005
Posts: 19,357
No they didddd-dentttt
RayR Offline
#13 Posted:
Joined: 07-20-2020
Posts: 8,793
ZRX1200 wrote:
Stocks are never worth zero and gold has been.


What?


Who said that? That's backward progtarrd talk.
Mr. Jones Offline
#14 Posted:
Joined: 06-12-2005
Posts: 19,357
You said it V.I.C.K.Y......VICCCCC- TORRRRRR
RayR Offline
#15 Posted:
Joined: 07-20-2020
Posts: 8,793
Mr. Jones wrote:
You said it V.I.C.K.Y......VICCCCC- TORRRRRR


What are you talking about? VICCCCC- TORRRRRR?
He isn't here, he only writes sick posts laughing at dead people and stuff.
Mr. Jones Offline
#16 Posted:
Joined: 06-12-2005
Posts: 19,357
You...

RAYr

Are
The
Same

Victor in disguise W/ a different credit acct with cbid
RayR Offline
#17 Posted:
Joined: 07-20-2020
Posts: 8,793
Mr. Jones wrote:
You...

RAYr

Are
The
Same

Victor in disguise W/ a different credit acct with cbid


HOW DARE YOU MAKE SUCH AN OUTRAGEOUS EVIL INSINUATION MR JONES!ram27bat
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