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Is gold a good investment?

There is a reason we favor diversification as an inflation fighter.

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Last updated: October 27, 2022 |

Article published: October 27, 2022

Gold has failed to shine as an inflation hedge. With inflation at 40-year highs, some Americans may be wondering whether gold is a good investment method to protect their financial security. Advertising from unregulated precious metals companies sometimes implies that this is the case.

We understand that it can be unsettling to see prices for goods you buy often – like food and gasoline – move higher. However, when it comes to gold’s market performance, it has proven to be an inconsistent and therefore ineffective way to protect against inflation over extended periods.

Let’s take a look at the historical data. In periods of sustained inflation such as 1980-84 and 1988-91, gold prices actually fell (see chart below). While they did rise at specific points within these periods, gold prices were highly volatile, so gold hardly served as a safe haven.

Gold during inflation

How has gold performed during the recent inflation spike?

After dramatic swings up and down, gold prices are down almost 2% since the start of 2021, while inflation has risen more than 7%, both on an annualized basis.*

So, why does gold have the reputation for being an inflation hedge? Things that are in fixed supply, such as gold or even works of art, can often be perceived as providing security against depreciation. Historically gold has been viewed as a store of value and thousands of years ago it was even used as currency. Until 1971, the U.S. dollar was pegged to gold.

But today, gold’s power as an inflation hedge is based mainly on past glory – it is merely people’s perception. Inflation concerns that boost gold prices are capricious, impossible to time, and can quickly fade with new information.

* Data according to Bloomberg and Morningstar.

chart depicting historical data on gold as an unreliable investment hedge

Importance of financial planning during times of inflation

Are you wondering about the impact of inflation on your portfolio? At Edelman Financial Engines, our Investment Management Team designs our clients’ portfolios so they can deliver across a range of inflation scenarios. Edelman Financial Engines invests across asset classes like bonds and stocks, which can reflect inflation expectations.

Your diversified portfolio may include exposure to commodities through the stocks of commodities producers, such as those in the oil, metals and mining industries.

Amid the headlines on inflation, market volatility and geopolitical strife, our fiduciary financial planners have our clients’ backs.

Our investment approach

One of our long-standing investment approaches is that we believe asset-class diversification is critical for investment success. Between 2007 and 2021, the average annual return of a hypothetical portfolio equally weighted in 16 major asset classes and market sectors would have been 7.8% per year. If you missed the best three asset classes each year, your return would have been only 3.9%.*

When constructing portfolios, we allocate across 17 asset classes by using a proprietary technology platform based on Nobel Prize-winning research and that has been awarded 12 patents in financial technology. We also monitor portfolios on a daily basis and rebalance them as needed to maintain their asset allocation.

If you’re interested in learning more, contact us today to connect with a planner and see how we can help move your financial life forward.

* Source: Morningstar

An index is a portfolio of specific securities (such as the S&P 500, Dow Jones Industrial Average and Nasdaq composite), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results. Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.

Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.

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