Investors are flocking to gold amid mounting inflation concerns, but by several measures, the precious metal isn't as effective a hedge...

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Investors are flocking to gold amid mounting inflation concerns, but by several measures, the precious metal isn’t as effective a hedge as some might believe.

Consumer prices are up 5 percent over the last 12 months, the fastest annual gain since 1991. Spooked by inflation and credit worries, investors in the past year have poured $1.6 billion net into precious-metals mutual funds, while taking a net $71.25 billion out of U.S. stock funds, according to Morningstar.

Gold now trades around $950 an ounce. It has jumped 36.6 percent in a year.

On an inflation-adjusted basis it has more than quadrupled since 1970, suggesting it’s a good long-term inflation hedge.

But on an annualized basis in the past 20 years, the metal looks less enticing compared with other asset classes. It also has lagged its own inflation-adjusted returns in previous 10-year periods, says PNC Chief Investment Strategist E. William Stone.

“Investors in gold would have actually lost purchasing power in both the 1980s and 1990s,” he writes in a note. “While we can’t say what the future holds for gold, we suggest that investors resist the apparent ‘gold rush’ in favor of alternative hedges — domestic equity, international equity, and TIPS — against the long-term impacts of inflation.” TIPS refers to Treasury Inflation Protected Securities.

Tom Winmill, portfolio manager of Midas Fund (MIDSX), disagrees. He says gold’s inflation-adjusted return in the past 10 years is better than that of bonds and stocks.

He prefers to compare gold to an index of the dollar’s value against six currencies instead of the Consumer Price Index.

“Inflation is simply the loss of the purchasing value of the dollar,” he notes. Gold is “good insurance, from that view.”

Gold and the dollar index have a close, inverse relationship, he notes. A falling dollar contributes to inflation by raising the price of imported goods.

Winmill expects inflation will worsen, as higher wholesale prices are passed along to consumers while the dollar remains weak.