Fool's Gold

Investigating the efficacy of owning gold in an inflationary environment

BY AMANDA AGATI

INVESTORS ARE CURRENTLY grappling with a slew of uncertainties — tariff policies, federal deficits, and the path of inflation, to name a few. When faced with an uncertain macroeconomic environment, investors often seek out assets that can provide a degree of “safety,” and often, gold rises to the top of the list. As investor concerns mount about market volatility, protecting purchasing power, and the long-term effects of outsized fiscal debt levels, there has been a marked increase in client inquiries for our perspective on gold as an investment asset.

Historically, central banks, which tend to have long-term investment horizons, have been the key financial users of gold. These institutions own gold in part because of tradition, but primarily to diversify their reserve assets. Some also hold gold as a means to mitigate the impact of international sanctions. Individual owners of physical gold maintain it is a highly portable, easily realizable store of value. These investors also often hold the assets with a longer-term view, sometimes as a hedge against unforeseen circumstances, with the rationale that over the long term, owning gold will help protect against inflation as the value of fiat currency goes down.

Some may be surprised to learn that we do not recommend commodities like gold in our strategic asset allocations. In our view, such assets do not generate meaningful, inflation-adjusted returns over the long term. There is no concrete data to support the belief that a long position in natural resources, specifically commodities, earns a persistently positive and significant risk premium.

We believe equities are a more effective hedge against rising prices than commodities. Over the past 20 years, gold has returned more than 9% annualized, while the Consumer Price Index has increased approximately 3%. While this would seem like a compelling case for investing in gold as a protection against inflation, when broadening to take into consideration the equity market, using the total return of the S&P 500® as a proxy, the narrative evolves significantly. Equity returns have outpaced gold by more than 100 basis points annualized over the same period.

In addition to lagging equity returns, gold does not provide an income stream, setting aside financial derivatives. Therefore, when inflation-adjusted yields are positive, there is an opportunity cost to investing in gold rather than a yield-bearing asset, such as equities or fixed income.

From a consistency standpoint, gold has also historically fallen short of equity and fixed income assets. According to Morningstar data, gold has outperformed the rate of inflation during 45% of rolling five-year periods, while investment-grade bonds have beaten inflation 86% of the time. Notably, from January 1981 through December 2000, inflation was up more than 100%, while gold was down 54%.

Given our view that we are in the later innings of the business cycle, we recommend allocations to large-cap, U.S. quality equities that have size, scale, and consistent earnings growth to help buoy the uncertain path of the cycle.

Amanda Agati is the chief investment officer of PNC’s Asset Management Group.