What’s the Best Hedge Against Inflation?

By Charlie Bilello

12 Mar 2021

If market participants are correct, higher prices are coming, with inflation expectations surging to their highest levels in over 12 years.1

When most investors read the word “inflation” they immediately think of Gold, as conventional wisdom states that there is no better hedge against rising prices.

Is this true? Let’s take a look…

Since 1975 (when Gold futures began trading), Gold has advanced 846% versus a 407% increase in the Consumer Price Index (CPI).

Case closed, then? You should buy Gold to protect against inflation?

Not necessarily. You see, Gold is not the only asset class in existence.

This is what that same chart looks like if we include Investment Grade Corporate Bonds, REITs, and Stocks…

Note: Investment Grade Bonds = ICE BofA US Corporate Total Return Index, REITs = FTSE Nareit All REITs Index (Total Return), S&P 500 Index = S&P 500 Total Return Index.

As it turns out, Bonds, REITs, and Stocks have all been far superior hedges against inflation than Gold. And they’ve all done so with lower volatility than Gold.

In terms of consistency, Gold loses out on that front as well. It has outpaced inflation in only 46% of rolling 5-year periods while Investment Grade Bonds have bested inflation 86% of the time.

And let’s not forget about the 20-year period from January 1981 through December 2000 when US inflation rose 102% while Gold declined 54%.

That’s not to say there aren’t times when Gold outpaces inflation, and by a wide margin. There certainly are, with the late 1970s stagflationary environment as the best example.

But it’s a myth to say that Gold has been anything close to “the best” hedge against inflation over the long term. The evidence suggests otherwise.

1. The 5-year breakeven inflation rate represents a measure of expected inflation and is calculated by taking the 5-year Treasury Yield and subtracting the 5-year TIPS real yield.

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