Inflation in the United States reached a 40-year high in February as consumer prices surged 7.9% year-over-year.
The New York Times cited food, gas and housing (rent) as three major factors contributing to an expensive environment for U.S. consumers.
Money expert Clark Howard says inflation can hit retirees, especially those relying on Social Security, the hardest.
The S&P 500 has declined by more than 1% in a year just twice in the last 19 years. But as of March 14, the benchmark had fallen by more than 12% in 2022.
There’s a possibility that high inflation could stick around for a while. So should you buy gold right now as a hedge?
A strong narrative that gold is a safe haven during unexpected inflation exists. But what does the data say? And what does Clark recommend?
Table of Contents
- Why Is Inflation a Problem for Investments?
- Is Gold a Good Hedge Against Inflation?
- Does Clark’s Investment Strategy Leave Room for Gold?
Why Is Inflation a Problem for Investments?
Inflation occurs when the price of goods and services increases over time. The result is that the longer you keep a $20 bill in your wallet, the less you’ll be able to get in return.
In order for you to retire comfortably, your investments have to outpace inflation. If you invest $1,000 and it grows into $2,000, but your rent also increases from $1,000 to $2,000, you haven’t made any progress.
A small amount of inflation can be healthy for an economy. But unexpected high inflation creates issues. with financial planning. It also helps borrowers and hurts lenders, which must charge a higher premium to account for uncertainty.
The stock market tends to perform quite poorly during periods of extraordinary inflation — in part due to that uncertainty.
Rising costs impact your favorite brands just as they impact your own wallet.
How Close Are You to Retirement?
The good news is that in the long term — over decades — the stock market almost always outruns inflation.
So if you’re far from retirement, “hedging against inflation” may be a poor objective. Buy and hold broad exposure to the U.S. stock market for many years, and history says you’ll come out ahead.
The worst-case scenario is that sustained high inflation occurs just as you’re drawing down your investments in retirement. In that case, you could be selling your stocks (and possibly bonds) at a low point while spending it during a time when costs for everything have skyrocketed.
“I find that people who are on fixed incomes are always the ones who have the most to lose from inflation,” Clark says.
Is Gold a Good Hedge Against Inflation?
Whether it’s a reputable news outlet, a trusted family member or someone posting on Twitter or Reddit, you’ve probably heard the claim that gold is an inflation hedge.
You may have even noticed that GLD, an ETF that tracks the price of gold, is up more than 8% in the last three months.
But before you digest that as confirmation bias, let’s consider some longer-term data.
The CPI, or Consumer Price Index, is an imperfect statistic for capturing real inflation. But it’s the index the U.S. government most often references.
If gold is a good inflation hedge, it should have a positive real expected return in times of unexpected inflation. In other words, when inflation skyrockets, does the price of gold tend to go up as well?
According to the Wall Street Journal, among others, gold and CPI have demonstrated a weak correlation. During the 50-year period ending in 2020, the ratio fluctuated between 1.0 and 8.4.
In other words, from a historical lens, one wouldn’t be able to predict the price of gold with any degree of accuracy simply by tracking periods of high inflation.
Can a large group of people decide to buy gold at the same time, initiating more demand than usual and driving up the price of gold? Yes. But there’s no historical precedent to say that gold provides positive returns during times of high inflation.
Worse, the S&P 500 has increased in value by 407.5% in the last 30 years. Compare that to an increase of just 179.7% for gold during that same time period.
Even if gold were a great inflation hedge, you’d still need to be Nostradamus to know when high inflation will start and end, and exactly when the stock market will or won’t rally. If you’d rather take out the guesswork and play the long game, the market is almost always the better choice.
A pair of Canadian financial advisors run a podcast called The Rational Reminder. In a heavily researched episode on inflation, they said, “Gold has this reputation as an inflation hedge. But it’s not. It has not been a historically good inflation hedge.
“One of the beliefs is that gold does maintain its purchasing power in the very, very long run. That could be true. … [But there’s an] opportunity cost for zero real returns in the very long run.”
Strictly looking at data, over extremely long time periods — think centuries — gold probably holds its value. But over decades, you can expect the stock market to outperform gold. And putting your dollars into gold means that those dollars aren’t in the stock market.
Does Clark’s Investment Strategy Leave Room for Gold?
Clark’s main retirement strategy is to take full advantage of your 401(k) and/or IRA options by putting the money into an inexpensive target date fund.
He thinks that in many cases, people buying gold as a significant part of their investing strategy are doing so because of the potential for societal collapse (governments, financial systems).
“Having too much of your assets in physical gold means that you’ve lost all confidence in the future of America and the world,” Clark says. “And I hope your head isn’t there.”
Clark has two main rules to buying gold. You don’t need to do so at all to follow his retirement strategy. But if you do, keep it to a small allocation of your overall portfolio (say, 5% or less) and don’t physically hold it (buy through an ETF or ETN instead).
Final Thoughts
Inflation, especially as high as we’ve experienced lately, can create anxiety and uncertainty. That’s even more true if you’re retired or hoping to retire soon.
However, if you’ve followed a long-term investing game plan, there’s no major reason to deviate.
You’re making your portfolio more complicated if you buy gold. It’s an unnecessary addition for most people, according to Clark. And there’s little evidence that you can predict how it will perform during times of high inflation.
