Ever since the United States came off the gold standard in 1971, gold has been a staple for many investors worldwide. That is because many see it as a hedge against inflation.
The ideal hedge is an investment that rises in value fast enough to protect the investor against a loss in purchasing power. But does gold do a good job in that role? It’s an important question, given the high inflation in recent years. Here, we consider the question from a Canadian perspective.
If you bought an ounce of gold in 1983, it would have cost C$523. But by 2001, that ounce of gold would have been worth less than a third of the initial investment, after adjusting for inflation. For that period, gold would have been a terrible hedge. Since 2008, gold prices have soared, but our investor from 1983 might no longer be around. For gold to be a good hedge, it should beat inflation on a more consistent basis.
As for the future, that is anyone’s guess. One school of thought is that gold will always rise as long as governments run up huge amounts of debt, something they are prone to do. Others, however, feel that gold will eventually lose its appeal with the rise of bitcoin. As for the most reliable hedge against inflation, it just might be a traditional portfolio of stocks and bonds.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
