Two the Point — All That Glitters May Not Be Gold

Gold has outperformed the stock market this year (-6.95% year-to-date versus -17.2% for the Russell 3000 as of September 7, 2022).  However, for investors looking to protect the purchasing power of their portfolios, data shows there is no better investment than stocks.
 
Although stocks are financial instruments, they ultimately represent ownership of real productive capital and the right to receive the profit generated by that capital.  In the short run, the link between stock returns and inflation is obscured by movements in a variety of volatile variables, not the least of which are current earnings and what investors are willing to pay for those earnings at any given point in time.  Over longer periods, however, these variables, and therefore stock returns, tend to be pulled toward more stable values, consistent with underlying economic fundamentals such as growth and inflation. Equity performs like a “real” asset, in the long run, better preserving a portfolio’s purchasing power over things like gold, treasury inflation-protected securities, and broad commodity exposure.

The long-term opportunity cost of owning gold has been tremendous.  Picking the perfect time to get in and out of any asset class is incredibly difficult – gold included.  Therefore, let’s look at the longer-term performance of gold versus stocks and bonds.  As becomes clear in the table below, nothing comes close to stocks when looking at a long-term inflation hedge, and bonds provide a far better risk/return profile while proving an equal inflation hedge, when compared to gold.
                Source: Bryn Mawr Trust; Factset

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