Does gold really stand up during times of inflation and falling markets?

Rising inflation, higher prices of real assets, a supply shortage of all major goods due to chaos at ports caused by a deadly virus that has spread around the globe and fears of a recession in most developed markets. It all reads as though we are living through a dystopian novel.

Yet if we were, one thing that investors should surely flock to is gold. After all, the ‘safe haven’ should hold its value in a world where everything else is falling.

Despite the commodity boom of the past 18 months, however, gold has failed to shine. Indeed, some might say the metal has been rather dull.

David Henry, investment manager at Quilter Cheviot, described this as a “head-scratcher”. Indeed, looking back over history, investors would be forgiven for expecting the asset to perform.

In the 1970s – an era that many commentators have said is the most similar to today’s environment – the price of the yellow metal rose more than 10 times higher in dollar terms.

“The narrative since then has followed that gold must be a decent inflation hedge, but the truth is not this straightforward,” said Henry.

In the 1980s, for example, the gold price did not match inflation towards the end of the decade and the same rang true in the late 1990s.

So if not that consistent a hedge against inflation, surely the old adage that gold will hold firm in times of hardship, such as a recession holds true – right?

This trend proves slightly more reliable, as the data from Quilter below shows. The return of gold in dollar terms during various recessions dating back to 1970 have always been positive, albeit exceptionally varied.

Returns from gold during different recessions

Source: Quilter Cheviot

Forget the arbitrary rules that gold goes up when markets fall, or that it should be a hedge to inflation. Henry said the key is the relationship it has with government bonds - in particular, the 10-year US Treasury.

“Per the awful performance of the bond market year to date, income yields have risen to beyond the market’s expectations of what average inflation will be over the next ten years - referred to as the ‘break even’ inflation rate. In this environment, the relative attractiveness of a lump of shiny metal which does not pay you anything diminishes,” he said.

So is it worth adding now? Well, history suggests if we are to enter into a recession then the asset should indeed make a positive return, although no one knows how much it will make and to come out in the black you would need to also know when to sell it at the bottom of the recession.

Henry, said he has always been “wary” of gold, as the price paid is purely based on what someone is willing to pay rather than a predictable income that comes with bonds or the underlying growth of earnings from equities.

“The analogy that I have used in the past is that valuing a gold bar can be like playing poker without looking at your cards – if you aren’t able to make a reasonable attempt at valuation it is a struggle to know what the odds of success are,” he said.