In search of an inflation hedge

It was January, and the year was 1980. I was a penniless college student heading into my final semester before graduation. My mother, a public health nurse for most of her adult life, decided I needed a class ring to let the world know of her son’s achievement. (She had done the same just a few years earlier, earning a bachelor’s degree at the ripe young age of 59.)

The price of everything was spiking in 1980. The United States was fighting runaway inflation, and a pair of deep recessions were about to get underway. A book called “How to Prosper During the Coming Bad Years” by Howard J. Ruff was on top of the best-sellers list.

The price of gold was more than $800 an ounce in January 1980. My class ring would cost a small fortune – more than any piece of jewelry she herself would ever own – but my mother would not be deterred. She bought the ring as my graduation present.

With inflation now back in the headlines again, I’m getting questions from investors on how to protect their portfolios. Just this morning I read in the Wall Street Journal¹ how nervous investors are pouring record amounts of money into exchange-traded funds that own gold. After all, isn’t gold the ultimate hedge against inflation?

I did some checking.

In January of 1980, gold prices and the Dow Jones Industrial Average were both around the 800 level, providing some nice symmetry for comparison purposes. In the 42 years since:

• Gold has increased in price by 2.2 times.²
• The Consumer Price Index has increased by 3.6 times.³
• The Dow Jones Industrial Average has increased by 39.3 times.⁴

Now, any gold bug who knows his history will point out that gold prices hit a peak in January 1980 that would not be seen again for nearly three decades. It would be unfair to judge gold’s effectiveness as an inflation hedge without looking at other, more standard time frames. Fair enough.

Over the last 10 years…

• Gold has increased in price by 1.1 times.²
• The Consumer Price Index has increased by 1.2 times.³
• The Dow Jones Industrial Average has increased by 2.8 times.⁴

Over the last 30 years…

• Gold has increased in price by 5.1 times.²
• The Consumer Price Index has increased by 2.0 times.³
• The Dow Jones Industrial Average has increased by 10.8 times.⁴

And over the last 50 years…

• Gold has increased in price by 37.6 times.²
• The Consumer Price Index has increased by 6.8 times.³
• The Dow Jones Industrial Average has increased by 38.6 times.⁴

I suppose one could argue that gold has been a good hedge against inflation if you search back far enough. But you will be hard-pressed to find an instance where gold has outperformed equities over a time period that is anywhere near long-term. So, if you’re concerned about the recent spike in consumer prices, it should be comforting to realize that one of the best inflation hedges you can own, based on historical results, might already be in your portfolio.

Mom would have chuckled at knowing what a poor investment she made back in 1980, because she knew her real investment wasn’t that gold class ring, but the person she gave it to.

I wouldn’t sell my college ring at any price. I keep it tucked away safely at home, right next to hers.

¹ “Investors Pile Into Gold for Safety”, The Wall Street Journal, January 26, 2022.
² London Fixing prices, Nasdaq.com
³ Federal Reserve Bank of St. Louis, U.S. Bureau of Labor Statistics
⁴ Yahoo! Finance

Any opinions are those of Mike Brown Financial Group and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.