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Gold as a hedge against inflation?

Gold as a hedge against inflation?

Over the past few weeks, I have been intensively researching the topic of gold as a hedge against inflation. I have come across many charts, articles and historical developments and videos that show a differentiated picture. It is often claimed that gold outperforms inflation in around 90% of cases. This is not statistically wrong, but does this automatically mean that it is a good inflation hedge?

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This chart shows that gold has outperformed inflation over the long term from around 1982. However, the trend was not uniform. The gold price fell steadily from 1980 until the turn of the millennium. From then on, it went sideways until the 2008 financial crisis, with a slight increase from 2006. After the 2008 financial crisis, the price of gold rose sharply. In 2014, political events such as the annexation of Crimea led to another decline. In the years that followed, the gold price tended to move sideways, rising slightly. The period from 2020 is particularly striking. Inflation rose sharply and gold was able to keep pace, but at times almost caught up.


This shows: Gold does not always react immediately to inflation. In times of crisis, it can offer a certain degree of protection, but it is not a guarantee. Even during the coronavirus pandemic, gold outperformed many indices in the short term - but often underperformed in calmer market phases with low inflation.

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A look at the average return confirms this. Gold returns around 6.38% per year in the long term. The MSCI World achieved around 10.19 % over the same period. This means that, on average, gold yields just under 4 % less per year. This is not insignificant, especially if you want to build up assets over the long term.

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Of course, there are arguments in favor of gold. Its value has been stable for centuries and it has survived wars, currency crises and economic upheavals. It is not a product with counterparty risk, is physically tangible and makes perfect sense in extreme scenarios. But gold also has weaknesses. It fluctuates in price, is not immune to losses, does not generate an ongoing income and, as a commodity traded in US dollars, is subject to additional currency risks for European investors.


If you look at all this soberly, the following conclusion remains in my view: gold can help to stabilize a portfolio, especially as an addition in turbulent phases. But it is not the reliable inflation hedge that it is often portrayed as. Investors who rely exclusively on gold often miss out on returns in stable times, and even in crises there is no guarantee that gold will actually provide protection.


Gold can therefore be useful, but more as a supplement. Not as the sole hedge against inflation.


Thanks for reading. I am always grateful for feedback.


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9 Comments

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I swear by a certain proportion of gold in my portfolio. I always have between 10% and 15%. I always withdraw the 5% after a year with tax-free gains. During periods of weakness, I invest 5% again. This way, the portfolio never falls below 10%.
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@Thomas_1963 10-15% gold is hardly noticeable in the long term. The overall performance of the portfolio increases by 0% and the drawdown decreases by perhaps 5%.
Why the effort?
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I'm pleased that someone has delved deeper into the subject of gold! Unfortunately, not many people here do.
I myself have had the entire B&H portion of my portfolio in gold since 2018 (currently almost 40%). Is doing much better than WeltAG.

But!

The topic of gold is much more complex. Gold may be a reliable hedge against inflation, but only over very long periods of time, around 100 years. For all periods below that, the point is pretty irrelevant. In the medium term, around 10-30 years, the correlations with real interest rates, money supply and government debt are more relevant. Even shorter, around 3-10 years, the USD cycle is dominant. In the short term, 0-3 years, gold is almost completely uncorrelated with equities, which makes it a highly interesting diversification asset in multi-asset strategies.
There are separate studies and justifications for each point. Very few "experts" are familiar with this range and concentrate on one aspect.

I personally trade the aspects of uncorrelatedness and the USD cycle. In other words, I am already slowly reducing my gold position. In 2026, when gold should be at USD 4500, I will probably sell around 70-80% of my gold. But because the USD is likely to have depreciated by 30-40% by then, there won't be much of the performance left in euros. So I have already started selling.

As I said, it's a bit more complicated. But it's worth it. 👍
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@Epi Yes, I said that it can make sense to add gold, but that it is not THE asset to compensate for inflation. I myself currently also have gold which I inherited
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@Christianxys Unfortunately, the statement "It CAN make sense to add gold" is not very helpful for most people. This is because the statement applies to pretty much all asset classes besides MSCIWorld.

The question is: WHEN does it make sense for WHICH portfolio to add HOW MUCH gold?

The result of my research (see my article from 2023): Risk-optimal for B&H WeltAG is 30%, minimum is 15%, everything below 10% is irrelevant.

Next: At the moment I would only buy hedged or leveraged gold. Everything else is nonsense because of the falling USD.

And I wouldn't even look at inflation. In the inflation year 2022, gold did not perform at all; since inflation has fallen, it has risen significantly. I would say that inflation and gold do not correlate at all in the short to medium term.
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@Epi Entry, Stop Loss, TP1/ TP2/TP3?
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@Ph1l1pp As I said, gold works a little differently. But let me translate for you:
Entry: Year 2018/ 1200-1300 USD, SL: -, TP: Year 2026-27 or 4500 USD.
Reentry: 2034
😏
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The correlation of gold with the S&P500 and gold over a decade, for example, is also interesting. I recently found a chart on this
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Gold is money, everything else is credit.
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