Which
is a Better Inflation Hedge- Gold or Stocks?
By Victor
Sperandeo with the Curmudgeon
Introduction:
In my 55+ years of professional experience, I have never seen
such puzzlement as to why gold and silver are not rising while inflation is
accelerating and at multi-decade highs.
Ill try to explain that conundrum in this article and indicate when the
gold price will rise.
Discussion:
As Curmudgeon post readers know, I have been a long-term
investor in Gold from 1994 and buy more during periods of weakness. (I also own
silver). Therefore, Im not inherently
biased when I strongly believe Gold is acting 100% correctly in NOT
APPRECIATING at this time.
Curmudgeon Note: Victor was
the keynote speaker at a November 2005 International Gold conference I attended
in San Francisco. He was bullish back
then, just before the yellow metals epic bull market rise from ~ $500 to $1900
per ounce. Asked if he preferred stocks
to gold mining shares Victor said, Ill go with physical gold, not precious
metal mining stocks.
..
On Wall Street, everything is about relative investments.
Gold is simply a rare metal. It does not
pay a dividend, but stocks do (currently 1.25% for the S&P 500).
I think stocks are currently a better inflation hedge,
because companies can raise prices on their goods, products or services and
maintain profit margins. They may even
raise their dividends to keep pace with inflation.
As the Curmudgeon noted in last
weeks column, the S&P 500s total return in 2021 was +28.7%,
while other stock indices were also up over 20% for the year. Clearly, equities were a superior inflation
hedge than gold which declined 4% in 2021 ($1893.66 on January 2nd
to $1815.77 on December 31st for a yearly loss of $77.89). Here are a few relevant quotes:
2021 was another
exceptional year for U.S. equity markets, Wells Fargo Investment Institutes
Chris Haverland said in a note to investors. The markets were supported by ...
highly accommodating fiscal and monetary policies, he added.
Its been an
extraordinary year as S&P 500 earnings are estimated to have surged about
45% year-over-year to a record $205.55 per share. And the growth isnt over,
analysts say. According to forecasts compiled by FactSet, S&P 500 earnings
are expected to increase by another 9.2% to $223.48 per share.
Also, there is a universally false assumption that
gold will decline when interest rates rise.
The opposite is true.
Most of the time, stocks decline when the Fed raises rates
persistently. Gold is money and like
cash is used to protect your net worth.
In that way, stocks and gold are negatively correlated, such that money
flows from risk on stocks to risk off gold when interest rates rise.
True, gold declines in a crash/panic like March 2020 or in
late 2008 after Lehmans bankruptcy, but it always comes back strongly.
Since World War II, the Fed raised short term interest rates
whenever inflation occurred. This time around, the Fed has not raised rates
(yet), so investors retained their equity investments. In fact, they added
record amounts to stock funds and ETFs!
However, expect gold prices to increase (and stocks to
decline) as the Fed raises rates, probably starting this March. The empirical evidence for that hypothesis is
from 1976 -1980 (I traded actively during that time and remember it like it was
yesterday):
- Inflation
accelerated as the U.S. dollar declined 21% from June 1976 till July 1980.
- The Fed Funds rate was 4.61% on January
1977 and rose to 6.56% on December 1, 1977 a +42.3% increase.
- Gold went
straight up during that same time period- from a low of $124.00 oz
on January 22, 1976, to $160.10 oz on December 1, 1977. It continued to appreciate for over
three years.
- Meanwhile, the
DJI topped on December 31, 1976, at 1004.65 (the DJI was more popular than
the S&P or NASDAQ at the time).
By November 1977, the Dow had dropped over 20% to 800.85.
- The Dow declined
for 11 consecutive months without a 5% rally.
- Commodity sector
stocks rallied from February 1978 through 1980 as inflation accelerated.
Conclusions:
When (and if) the Fed raises rates significantly, stocks will
decline, and money will be reallocated to gold.
References:
https://fred.stlouisfed.org/data/FEDFUNDS.txt
https://sdbullion.com/gold-prices-1977
End Quote:
Its not what you look at that matters, its what you see.
Henry David Thoreau, an
American naturalist, essayist, poet, and philosopher.
Stay healthy, enjoy life, success, good luck and all the best
for 2022. Till next time
.
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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