Investors are often said to turn to gold as a guard against high inflation, but the precious metal has struggled to keep up with a recent surge in prices of nearly everything during the past several quarters.
In early 2020, when the world economy was in the grips of the COVID-19 pandemic, the London Bullion Market Association nominal price of gold surged 8.1% from a first-quarter average of $1,584 per ounce to a second-quarter average of $1,713/oz. The quarterly average price of gold adjusted to first-quarter 2020 dollars mostly kept pace with the nominal gold price through the first three quarters of 2020. However, the two price metrics began to diverge afterward, and the difference widened as the pace of inflation increased. By the third quarter of 2023, the nominal price of gold was 16.9% higher than the real price in 2020 dollars.
"Gold is a classic inflation hedge, but most hedges work best in the short term. Over the long term, gold has tracked inflation, but even government bonds have performed better historically," Asher Rogovy, chief investment officer at long-term investment adviser Magnifina, told S&P Global Commodity Insights. "Many people overlook stocks as an inflation hedge. I'm guessing this is because stocks react negatively to the Fed's classic response to inflation."
Stocks' performance against inflation is so well known that it is a recurring question on several financial industry exams, Rogovy said. For either gold or stocks, by the time inflation is flowing into the data, it is often too late to hedge, he said.
"It comes down to timing," Rogovy said. "The Fed reacts after inflation shows up in the data, but over this period of time, stock prices tend to increase along with inflation."
Going back further, the nominal price of gold did a fair job of chasing inflation in 2018 dollars, but again, there was a divergence. In the second quarter of 2020, the nominal price of gold was 3.2% higher than the inflation-adjusted price in 2018 dollars. By the end of the most recent third quarter, that nominal price was 21.1% higher than the inflation-adjusted price.
A hedge against risk
Juan Carlos Artigas, the global head of research at the industry-backed World Gold Council, suggested a few reasons the inflation-adjusted price of gold has recently trailed behind the nominal price. For one, general commodity prices also tend to rise with inflation, increasing the cost of oil and other inputs that go into manufacturing and mining. Gold tends to catch up later when other commodity prices come down, Artigas said in an interview. Investors are also buying up gold for other reasons, he added.
"There is a misconception that the only thing that gold is hedging is inflation," Artigas said. "That is not accurate. Gold should be thought of as a risk hedge. One of the risks that investors face is inflation — but it's not the only one."
Multiple geopolitical conflicts in recent years have led to some of the typical "flight to quality" among investors that usually benefits gold investment, Artigas said. However, as the World Gold Council noted in its recent 2024 outlook, higher interest rates like those seen in recent months make bonds more attractive to investors, drawing attention from gold, while a stronger dollar also tends to weigh on the gold price.
Rogovy does see a case for gold, even if it loses ground against other investments in some scenarios.
"Gold does carry a significant advantage over stocks in that it hedges against stagflation," Rogovy said. "A stagnant economy is no good for stocks, so it reduces the opportunity cost of holding gold. Stagflation may arise from cost-push inflation, where there is a surplus of money chasing a deficit of resources."
An increase in geopolitical risk is another factor that has a tendency to send investors scrambling for gold.
Tensions in the Middle East could drive the gold price up as high as $2,075/oz, Bas Kooijman, CEO and asset manager of DHF Capital, said in an emailed statement.
"The escalation has helped extend gold's uptrend of the last two months as traders take into account changing expectations regarding monetary policy," Kooijman said. "Traders have been betting on an end to the interest rate hiking cycle and possible rate cuts in the first half of next year, which could continue to support gold's rise over the medium term."
Of course, stocks also typically rise amid rate cuts. Goldman Sachs Research recently forecast a total return of about 6%, including dividends, for the S&P 500 Index in 2024.
"Our analysts project that growth stocks, which have a higher expected growth rate than the rest of the market, may be attractive given stable economic growth and interest rates," Goldman Sachs shared in a Nov. 20, 2023, article on its website.