Why do they say gold isn't a hedge against inflation?

[perfect_simulation]

Looks like its working to me

[seajay]

It's not a consistent inflation hedge.

If you dropped 33% into stock, 67% into gold, non rebalanced, spent gold first then historically a 3% SWR ranged from gold lasting 13 years to ... many many years. So in the lower case you only got back 13 x 3 = 39 of the initial 67 gold value amount (in inflation adjusted terms).

The price of gold is volatile, a factor however is there's a degree of multi-year inverse correlation between stocks and gold. In the case above when gold lasted 13 years, stocks did fantastic and vice versa, in the cases of when you were still spending from gold after 30 years, well that gave plenty of time for stocks left to accumulate over those years did OK/well.

[mathjak107]

it is only a hedge if the inflation is causing the dollar to weaken , which it has not.

gold did a good job in india up 68% since 2020 but it hasn’t done a good. job in dollars since we saw this spike

[Hal]

It sure is helping in Australia !

[mathjak107]

gold is a competitor to the dollar so a dollar can wipe away golds moves the same as it can wipe away gains in international stocks .

[welderwannabe]

When I look at my portfolio, my gold has outperformed everything else during the period inflation has been crazy. I'd say its doing just fine.

[ppnewbie]

Great reading about gold in a portfolio:

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/

In the article below, you can go do the section "All that glitters is not a good investment" but the whole article is fantastic

https://portfoliocharts.com/2021/12/16/ ... ortfolios/

[seajay]

British perspective since 1793 for 50/50 US$ invested in US stocks/gold. Where when gold was money (Sovereign gold One Pound coins pre 1930's) its assumed that they lent that gold (money) to the state, as a form of safe keeping of their gold coins - which in return they were paid interest. From 1932 its assumed they instead preferred to keep hold of their gold, physical in-hand, as the law backing that paper Pounds (notes) that were previously exchangeable for Sovereigns (gold) was repealed (direct convertibility between paper Pound notes and gold ended).



Did that consistently hedge inflation? Yes - in the context of a 30 year 3.333% SWR, the return of your inflation adjusted capital via yearly instalments, never failed. In the worst case you also ended with over half the inflation adjusted start date portfolio value still available at the end of the 30 years, in the median case you ended 30 years with 1.6 times the inflation adjusted start date portfolio value.

Alone, gold isn't a reliable consistent inflation hedge. Combined with stocks and it has been a reliable inflation hedge, at least over all 30 year periods within the last 230 years. Even including across the decline of the world war one years when both the British and German empires bankrupted themselves, literally blew their wealth away. And across the other pretty horrendous times that periodically occurred during those 230 years of history.

[Xan]

Seajay, very interesting. I didn't know that Britain ended gold convertibility so long before the US.

I'm curious as to how you came up with 1793 as a start date. And I'm not entirely convinced that the 1932 date isn't a bit of cherry-picking as well. In any case, it's very impressive.

[Hal]

Interesting read Seajay - Thanks.

Some more history
https://www.parliament.uk/about/living- ... -standard/

[seajay]

Seajay, very interesting. I didn't know that Britain ended gold convertibility so long before the US.

I'm curious as to how you came up with 1793 as a start date. And I'm not entirely convinced that the 1932 date isn't a bit of cherry-picking as well. In any case, it's very impressive.

1793 was the limit of my US stock data sourced from https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

1931 and the UK ended Sovereign gold Pound coin convertibility from paper Pound notes, basically a gold run where too many Pound notes were being converted to gold to the extent that direct convertibility plug had to be pulled. The US sorta followed that lead in 1933 when Americans gold was compulsory purchased. Prior to 1931 savers wouldn't have been inclined to hold Sovereign gold coins at home (cash), it was safer to deposit/invest that gold, such as buying treasury bonds/whatever and being paid to do so (interest). At the time, savers/investors were faced with having to make a decision of whether to keep bonds, but where money was no longer backed by gold, or withdraw their gold (sell the bonds). As many thought it was the end of the world and given the ongoing gold-run, I suspect many might have taken the gold option. The Chancellor at the time confronted with having to end convertibility had a nervous breakdown and the final decision to make the break had to be made by others in his absence. Newspapers of Tuesday 22nd September 1931 for instance highlighted how the Bill to suspend the Gold Standard passed through Parliament in under seven hours, little/no debates/speeches, rapidly ping-ponged between both Houses to become a Act (law) - following the Bank of England reporting to Parliament that credits by France and America had been practically exhausted i.e. physical gold was running out.

Then along came world war two, and it wasn't until the mid 1940's (December 1945) when Bretton Woods was agreed, in effect where for international trade countries agreed to use the US dollar, that in turn would be pegged to gold by central banks at a $35/troy ounce rate. i.e. other currencies pegging to the US dollar (or more strictly to within +/- 1% tolerance of it). Which held up until 1967, where as a means to pay down the high cost of the Vietnam war in 1968 the US broke that pegging.

Rather than cherry-picking its more the reverse. Someone who held T-Bills instead of gold 1934 to 1967 would have done better than someone who held gold where the price remained at $35/ounce. Such that the assumptions made reflects more a conservative aspect than that of a cherry picked better case outcome. Those holding gold however saw that gap closed/reversed in the years from 1968. For that to occur the price of gold needed to increase by a factor of 3 (catch back up to inflation pacing) which it did so by the early 1970's, but when there was also high inflation around those years so its price had to continue on further upwards - which it did, and more (over-ran), such that in the 1980's its price dropped back down (corrected the over-run). Fell out of favour and over-extended to the downside, until the noughties (2000's).

As a guide, Dow/Gold of 20 times might be considered middle-road'ish. So with recent Dow of around 33,333 = 33333/20 = 1666/ounce gold price. In 1980 that had declined to a near 1.0 ratio, just a single ounce of gold to buy a Dow index share, whereas in 1999 a single Dow share bought 40 ounces of gold. But that's a very casual measure, recent gold price of around 1850 being within 10% of that for instance.

More generally you might say that pre 1930's investors were inclined to hold bonds instead of gold (deposited their gold coins rather than keeping them in-hand) and where inflation broadly averaged 0% when on the gold standard (finite gold). Bond and stock total returns were much the same. From the 1930's ending of money being gold and the predominance has been towards inflation and where bonds no longer yielded a real return comparable to stocks, but instead dropped to more broadly being 0% real expectancy, after inflation and taxation, similar to gold. Such that gold and bond are broadly equally interchangeable, hold one or the other or if you prefer ... both. On that measure and from a 2000 base start date in order to eliminate all of the prior circumstantial factors and 50/50 stock/gold versus 50/50 stock/bonds have tended to follow similar motions, but where stock/gold is the more volatile of the two, so inclined to zigzag around stock/bond, but at the benefit of lower taxation risk (no regular interest payments that otherwise might be taxed).

One might hold 50/50 of both, 50/25/25 stock/gold/bonds, but generally that might not be that much different to holding a third of each. Or just pairs (stock/gold or stock/bonds). Whichever turns out to be the better is inclined to be down to luck, but broadly where overall outcomes might be within the same ball-park. For me gold is more tax efficient than bonds such that I'm more biased towards stock/gold than that of stock/bonds.

[seajay]

For gold, inflation ...etc. data https://www.measuringworth.com/ has extended historical data

[stuper1]

British perspective since 1793 for 50/50 US$ invested in US stocks/gold. Where when gold was money (Sovereign gold One Pound coins pre 1930's) its assumed that they lent that gold (money) to the state, as a form of safe keeping of their gold coins - which in return they were paid interest. From 1932 its assumed they instead preferred to keep hold of their gold, physical in-hand, as the law backing that paper Pounds (notes) that were previously exchangeable for Sovereigns (gold) was repealed (direct convertibility between paper Pound notes and gold ended).



Did that consistently hedge inflation? Yes - in the context of a 30 year 3.333% SWR, the return of your inflation adjusted capital via yearly instalments, never failed. In the worst case you also ended with over half the inflation adjusted start date portfolio value still available at the end of the 30 years, in the median case you ended 30 years with 1.6 times the inflation adjusted start date portfolio value.

Alone, gold isn't a reliable consistent inflation hedge. Combined with stocks and it has been a reliable inflation hedge, at least over all 30 year periods within the last 230 years. Even including across the decline of the world war one years when both the British and German empires bankrupted themselves, literally blew their wealth away. And across the other pretty horrendous times that periodically occurred during those 230 years of history.

That's a very interesting chart you posted. Is it possible to make a chart that shows 100% stocks over that time period? How about 50/50 stocks/bonds?

[seajay]

Red = stocks
Green = stock/bond 50/50

[seajay]

Whilst all-stock is more rewarding, on average, outcomes are also more variable/volatile. For example 4% 30 year SWR outcomes for a British investor holding US stock compared to 50/50 US stock/gold had deeper left tails for all-stock. For individual cases within the broad average it was safer to hold stock/gold than it was to hold just stock. But where in the better case outcomes all-stock was the more rewarding.

Sorted 30 year 4% SWR final real portfolio value outcomes ...


For many, reducing the risk of a bad case (left tail) outcome, achieving a modest/OK outcome, is more preferable than a maybe bad case, or maybe a great case outcome coin-flip.

[Mark Leavy]

Seajay, I just want to say that I have thoroughly enjoyed your posts. Well thought out. Well written. Well researched.

A gold standard, if you will.

Thank you,
Mark

[SilentMajority]

Seajay, very interesting. I didn't know that Britain ended gold convertibility so long before the US.

I'm curious as to how you came up with 1793 as a start date. And I'm not entirely convinced that the 1932 date isn't a bit of cherry-picking as well. In any case, it's very impressive.

If someone goes all the way back to 1793 to "cherry-pick", I'll accept it. Over 230 years I think the benefit to picking a favorable starting point would kind of get washed away lol.

[seajay]

Britain 1896 - split your wealth three ways, a third in a home/property, a third in gold, a third in hard US dollar bills (conceptually, because you can't easily) rebalanced to thirds each yearly ... and more recently that would have retained its purchase power (whilst also having had the imputed rent benefit along the way). No counter-party risks, three currencies, three asset diversity.

Invest the dollars into stocks and any nominal gains, proportioned to a third weighting, would have added real gains with modest counter-party risk (T+2 days trading time to liquidate into cash).

For that, I did assume that when on the gold standard, Sovereign gold Pound coins were cash, that the coins were deposited in return for some interest (and safe keeping) in pre 1932 gold standard years, so not strictly without counter-party risks in those years.

Imputed rent averaged 4.2%, so 1.4% proportioned to a third weighting, so if stocks nominal total returns were 10%, =3.3% proportioned, that summed with 1.4% imputed rent benefit = 4.7% real.

Looked at from just stock/gold liquid assets, 50/50 yearly rebalanced ... comfortably supported a 3.33% 30 year SWR (return of your inflation adjusted money) and most often left a residual portfolio value comparable to the inflation adjusted start date portfolio value. Have-cake-and-eat-it. Return of your inflation adjusted money via 30 yearly instalments, and a terminal 'bonus' of your inflation adjusted start date portfolio value.