Good as gold? Don’t be fooled

Conventional wisdom posits gold should shine when geopolitical storms strike and erupt into war. And since many view war as inflationary, gold’s legendary reputation as a hedge against rising prices should be an added tailwind, with oil prices widely feared to ignite widespread inflation. Neither has held true this year. And that isn’t special: When Fisher Investments reviews the yellow metal’s vaunted record, we find it isn’t a good hedge against anything. This is a reminder that one should check things we all know against the evidence before buying into them.

Consider 2022, when war also flared and inflation spiked. Gold sprung in the lead up to Russia’s late-February Ukraine invasion. Ukraine war rumblings began in late 2021, and from 2022’s start to 8 March—as the first full-scale war in Europe since World War II dawned—gold shot 12.3% higher, seemingly validating its safe-haven status.[i] But as Fisher Investments reviews it, this spurt was soon spent, and gold shrivelled after the war’s onset, falling -12.5% into July as war continued to rage—hardly a haven.[ii]

Also raging? Global inflationary pressures. Australia’s CPI surged from 3.5% y/y at 2022’s start to 7.9% by 2022’s end, the Lucky Country’s biggest erosion of purchasing power since 1990.[iii] Gold wasn’t so “safe” then. Whilst rising 7.6% in 2022, it lost lustre adjusted for inflation. Now, global stocks also fell that year, hitting a low in June. But few consider them a haven against war and inflation. And extending the picture a bit, stocks recovered their January 2022 peak in June 2023.

Nor was 2022 an aberration. According to Fisher Investments’ review, gold also failed to protect in 1975 – 1976, 1980 – 1982, 1990 – 1991 and 1995 – 1997—all featuring inflation above Australia’s long-term 4.8% y/y average.[iv] Take the mid-1970s, when Australian inflation ran in the high teens. As Exhibit 1 shows, from February 1975 to August 1976, gold tumbled -38.8%. When gold should have gleamed most, it dulled. Whilst gold climbed from there—as inflation decelerated—CPI’s reacceleration in the early 1980s coincided with gold dropping -51.2%.

Exhibit 1: Gold Loses Relative Lustre Long Term

Gold’s tarnished record goes on in Fisher Investments’ review of its history. In the early 1990s, inflation peaked above 8% again, and whilst it decelerated sharply thereafter, gold fell -18.2% from January 1990 to September 1991. In 1995, CPI revved to over 5% and gold proceeded to drop more than -20%. Once again, gold didn’t deliver.

Gold’s disappointment doesn’t just occur in spots through history. As Fisher Investments’ review also shows in Exhibit 1, its entire run is subpar. Since 1975, gold’s annualised return is 7.7% versus global stocks’ 10.7%.[v] A three percentage-point difference is noteworthy when compounded over time. Stocks’ returns are smoother, too: a 13.7% standard deviation compared to gold’s 19.1%.[vi] Standard deviation measures returns’ degree of fluctuation around its average. Over any 12-month timeframe, about 68% of gold returns’ observations were within plus or minus 19.1 percentage points of its annual average—over 5 percentage points more than stocks’. So not only are gold returns lower, it is more volatile. Financial publications Fisher Investments reviews often tout gold’s benefits and call it a haven. But it is hard to see this safety in the data. And for investors seeking long-term growth to meet their financial goals, we don’t see how gold helps.

Though gold may occasionally boom, there are decades-long stretches where it flatlines. Most notably from 1980 to 2006, gold never made new highs. This makes timing gold’s runs paramount for investment success. But here is the problem: It is impossible to time reliably. Gold is a sentiment-driven commodity, without much industrial use and little physical demand outside jewellery. Fisher Investments’ reviews of gold swings find them dependent on investors’ moods, whims and wildly varying perceptions of its attractiveness as a store of value. As we have seen, sometimes it might be viewed as a “safe haven”—but oftentimes not. We think this inconsistency—especially when its alleged hedging powers are supposed to come in handy—rather undermines its raison d’etre.

Stocks, on the other hand, are a slice of ownership in a company’s future earnings, which benefit from its adaptability and ride economic expansion—things gold doesn’t do. And since stocks generate earnings, that also gives them pricing power, which is why their returns beat inflation over time. When their costs rise, they have every incentive to find ways to remain profitable—or go out of business. Globally competitive corporations sink or swim on their ability to make money. Although they aren’t guaranteed to grow, when you own stocks, they are collectively working for you. You share their profits. No such luck with gold.

So when Fisher Investments reviews the “precious” metal, its glint can be alluring, but investors chasing it may easily find a mirage.