Gold is often touted as a hedge against inflation and a defensive asset to be used in volatile or falling markets. But with the current inflationary environment and the bearish mood in the stock market, should investors be buying physical gold or gold stocks as a hedge?
For an asset to be used as a hedge, it must rise in price to offset what it is hedged against. To use gold as a hedge means it needs to rise inline or higher than inflation.
Looking at gold prices right now, we know that gold was trading just under US$1,800 an ounce in June 2020 and by August 2020 it had risen to around US $2,000 an ounce, however, more recently, it has been trading back below US $1,800 an ounce.
Over the same period, inflation has risen from 0.7% to 5.1% while the Australian stock market has risen 12.85% since June 30, 2020 to today. Looking at these figures, you would have to agree that gold is neither a defensive asset nor a hedge against inflation.
Since January 1, 2022, the All Ordinaries Index is down just over 12%, while gold is only marginally down, which doesn’t support the argument for gold to be used as a hedge although it has been more defensive than holding direct shares.
If we look at the 10 largest gold stocks in 2022, we see falls of between 3.37% for Perseus Mining Ltd (ASX:PRU, TSX:PRU, OTC:PMNXF) up to 40.59% for Evolution Mining Ltd (ASX:EVN), with the average fall just over 22% – and all are looking like they will fall further.
There appears to be no identifiable reason why gold stocks are falling so heavily and why physical gold isn’t falling by much, but if you have been looking at gold as a safe haven or hedge, you may want to rethink your strategy.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate YourWealth – It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au