Last Updated: 19 March 2023
I want to take issue with your last comment about Precious Metals, Paul, and their role as a hedge against inflation. This is a hot topic in the industry right now.
There’s a great research piece on HardAssetsInvestor.com talking about gold and inflation. It includes two competing arguments.
One, from the World Gold Council, notes that gold cost $20.67/ounce in 1900—a figure which, when adjusted for inflation through 2006, translates into $503/ounce. Amazingly, for the two years ending December 2006, gold averaged $524/ounce. By that measure, gold is a great store of value.
But the other argument comes from Larry Swedroe, who takes up the case starting in December 1980, when gold was trading at $641/ounce. Swedroe writes:
“Over the next 27 years (1981-07), inflation rose at an annualized rate of 3.4%. If gold were an effective hedge against inflation, its value at the end of 2007 should have been at least $1,528. Yet, it was worth just $833/ounce.”
Rather than holding its value, gold lost 55% of its purchasing power over that 27-year time frame. When you consider that an investor who bought gold in 1980 forfeited, at the very least, the collateral return on ultra-safe Treasuries, it is clear that gold was a both a terrible investment and a terrible store of value.
What conclusion can we draw except that gold … Old Faithful in many peoples’ eyes … is actually unreliable as a hedge against inflation? It’s subject to booms and busts just like everything else.
Can we really trust gold to be a good hedge for inflation over the next 10 years?