Fool’s Gold: The Mathematics and Misconceptions of Inflation Hedging

Times change and numbers don’t lie. Inflation is up 6.2% this year. Gold (GOLD) is down 14.78% YTD. Assuming your gold investment will offset a weakening dollar is an old school philosophy that must be put to rest. Investors around the globe are waking up this morning wondering why their “protection” against inflation isn’t working. The answer is in the numbers.

Gold as a hedge is based on the belief that when the value of the dollar decreases, the value of gold will increase. The hypothesis proved itself over time during the 20th Century when gold prices seemed to move in direct relation to inflation. Even that was an illusion. Gold prices rose because the dollar fell. The actual value of the gold didn’t change.

Assumptions based on ancient history are dangerous. Real estate was always considered a stable investment until the housing market crashed in 2008. Today, we know better. Bitcoin (BTC) was viewed as a novelty that wouldn’t last when it opened at $327 in 2015. It broke $66K earlier this month. We live in a different world. It’s time to leave the past behind.

Gold Isn’t All That Precious in 2021

Though it’s still rated as the fifth most valuable metal on earth, gold has few practical uses in modern society. That makes its value speculative, much like cryptocurrencies. Other metals, like uranium and lithium, are in higher demand and considered essential for the clean energy movement. Gold is used in electronics, but not heavily enough to guarantee its future.

The Global X Uranium ETF (URA) is up 81.79% YTD. Piedmont Lithium (PLL) is up 112.08% YTD. I wouldn’t sell either of them to buy gold. As inflation has risen, so have my “precious” metal stocks. Instead of hedging, which is basically surrendering to losses, I continue to be aggressive in the segments that matter. The future dictates my investment strategy, not the past.

Another element that falls in this category is silicon. It’s a metalloid, not an actual metal, but it’s an essential ingredient in the development of semi-conductors. One of my favorite holdings in this category is Silicon Laboratories Inc (SLAB), a Texas based semiconductor manufacturer that’s up 63.54% YTD. Use your gold to buy some of that.

Commodity ETFs Will Get the Job Done

I’m an aggressive investor, so I’m always looking for double-digit returns. That type of mindset also leaves me open to losses (occasionally), so I try to include some safer options when I make stock recommendations. If you’re risk averse, you could buy treasury inflation-protected securities (TIPS) or find a comfortable 60/40 portfolio model. Both are safe options.

To me, a safety net would be a commodity ETF. Commodities are usually considered volatile investments because demand, geopolitical factors, and even bad weather can affect their value. I’ve found that commodity ETFs are fairly consistent during inflationary periods. Check out the iShares S&P GSCI Commodity-Indexed Trust ETF (GSG). They’re up 42.57% YTD.

Don’t waste your money on gold. Old-school advisors will argue with me about that, but I’m happy to compare my returns to theirs any day. We’re living in a digital world, one where the most precious metals are those that contribute to the development of new technology. If you want to beat inflation, invest in those. Look to the future. It’s the 21st Century.


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About the Author

Fool’s Gold: The Mathematics and Misconceptions of Inflation Hedging

Kevin Flynn

A former financial professional and founder of AdvisorScale Financial Writing, Kevin lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.