By Barani Krishnan
Investing.com -- Inflation is here and the conventional wisdom is that we should buy gold. Conventional should actually be underlined as gold’s history as an inflation hedge is anything but certain.
Gold has had spotty returns over the past few months despite creeping price pressures and fears that U.S. inflation in 2021 could be the worst in 35 years.
Those surprised or frustrated by this might benefit from studying the history of the precious metal’s returns over the past 40 years.
A Morningstar analysis of gold’s returns during some of the highest U.S. inflation periods since the 1980s shows a negative yield for long-only investors in the yellow metal.
Commodities other than gold - as well as REITS, or real estate investments trusts, and TIPS, or Treasury Inflation Protected Securities - actually performed better than gold, and more like an inflation hedge, during these periods.
Year-to-date, benchmark gold futures on New York’s Comex are down 1.4%. The spot price of gold, which reflects live trades in bullion, is almost 1% lower on the year.
In comparison to these, the Consumer Price Index, a globally accepted measure of inflation, expanded by an annual rate of 5% in May in the United States.
The Personal Consumption Expenditures Price Index, a tamer measure of inflation used by the Federal Reserve, rose 3.6% in the year to April.
Until the Covid-19 outbreak and the chronic disruption of U.S. supply chains that followed, the Fed’s target of keeping annual inflation at or under 2% has barely been challenged over the past decade.
Now that it has, inflation is the one risk that’s on top of investors’ minds. But gold hasn’t delivered - to expectations at least.
“Gold is really not a perfect hedge” for inflation, Morningstar portfolio strategist Amy Arnott said in a CNBC post this week that analyzed the returns of various asset classes during periods of above-average inflation in the United States.
“There’s no guarantee if there’s a spike in inflation, gold will also generate above-average returns,” Arnott added.
Gold’s correlation to inflation has been relatively low - 0.16 - over the past half century, Arnott said. This metric shows how closely gold and inflation track together. A correlation of 0 means there’s no relationship, while a correlation of 1 means they move in unison.
Arnott’s study shows that long-only investors in gold lost 10% on average from 1980 to 1984, when the annual inflation rate was about 6.5%.
Similarly, gold yielded a negative 7.6% return from 1988 to 1991, a period when inflation was about 4.6%.
REITs returned 11.5%, 20.4% and 9% over 1973-79, 1980-84 and 1988-91, respectively. Commodities other than gold yielded 19.4%, 2.3% and 21% over the same time frames.
In modern-day history, gold’s most glorious run was during a five-month stretch last year, when it went from a low of nearly $1,477 in March 17 to a record high of $2,120 by August 7 - a gain of 44%.
But as an inflation hedge, gold really outperformed between 1973 and 1979, when it gained 35% while the annual inflation rate in that period averaged 8.8%.
My own analysis shows that the gold speculator, regardless bull or bear, may have found the perfect play for now: buy at near $1,850 and sell well before $1,900.
The $40-50 target for each trade may seem like a dumbed-down way to trade gold when a myriad of chart signals and the intersection of Treasury yields and the dollar should be setting the course.
Yet, a look at the weekly fluctuations on Comex since mid-May suggests that the former would have generated more wins than any artsy-fancy strategy involving multiple hedges.
As the latest week rolled to a close, an all-too familiar pattern reinforced itself, forcing gold once again below the key bullish mark of $1,900.
The Comex high for the week was $1,906.15 while the low was $1,871.95 - keeping within the $30-$50 range of the past month.
Wobbly since its return on Thursday to $1,900 pricing, gold took a decisive turn lower after Friday’s release of the University of Michigan’s closely followed Consumer Sentiment for June, which came in at 86.4, versus expectations for 84.2 and the May reading of 82.9.
That nudged the 10-year Treasury yield higher, but not by much, to 1.462.
The bigger damage to gold probably came from Friday’s somewhat inexplicable rebound in the dollar - although the greenback also did not get too far, with an intraday high of 90.61.
Phillip Streible, precious metals strategist at Blueline Futures in Chicago, said the logic-bending move in the dollar did not make Friday’s trade in gold any easier.
“It’s the same mind-numbing thing each week,” said Streible. “Between gold, the dollar and yields, you have three different plates spinning at the same time, and you’re trying to decide which one to go with - when none really is appealing for now.”
Gold Market and Price Roundup
Gold futures for August delivery on New York’s Comex did a final trade of $1,879.25 an ounce before the weekend, after settling Friday’s trade at $1,879.60, down $16.80, or 0.9%. For the week, it fell 0.7%.
The spot price of gold, reflective of real-time trades in bullion, settled Friday’s trade at $1,877.72, down $20.31, or 1.1%. For the week, it fell 0.7%.
Traders and fund managers sometimes decide on the direction for gold by looking at the spot price - which reflects bullion for prompt delivery - instead of futures.
Oil Market Brief & Price Roundup
Oil prices rose for a third straight week on speculation of runaway summer demand for fuels, although some investors were keeping a wary eye on gasoline, which hasn’t performed to expectations since the start of the peak U.S. driving season.
West Texas Intermediate crude, the benchmark for U.S. oil, did a final trade of $70.81 before the weekend, after settling Friday at $70.91, up 62 cents, or 0.9%. Its session high was $71.23, a peak since October 2018.
For the week, WTI showed a 1.9% gain, extending the 5% rise and 4% rally in the two weeks prior.
Brent crude, which acts as the global benchmark for oil, did a final trade of $72.59 before the weekend, after settling Friday’s trade at $72.69, up 17 cents, or 0.2%. Brent earlier rose to a session peak of $73.07, the highest for a day since May 2019.
Brent ended the week up 1.1%, after last week’s gain of 3% and the previous week’s rally of 5%.
Oil prices have been on a tear lately amid projections for one of the biggest ever summer demand periods for fuel in the United States as the country reopens fully from Covid-19 lockdowns.
The International Energy Agency, which represents the interests of Western oil consumers, said in its monthly report that global producers would need to boost output to meet demand set to recover to pre-pandemic levels by the end of 2022.
“OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” the Paris-based IEA said, referring to the 13-member Organization of the Petroleum Exporting Countries and its 10 non-member allies.
Despite the optimism over global oil demand, US gasoline take-up has been tepid since the May 31 Memorial Day that marked the start of the peak summer driving period in the world’s largest oil consuming country. That suggests to some that more time was probably needed for U.S. fuel demand to accelerate.
The problem was particularly highlighted by the U.S. Energy Information Administration’s Weekly Petroleum Status report released Wednesday, which showed gasoline inventories rising by 7.05 million barrels during the week ended June 4 - nearly six times above analysts’ estimates for a 1.2-million-barrel build.
The Washington-based EIA also reported that stockpiles of distillates, which include diesel and heating oil, rose by 4.4 million barrels against expectations for a 1.8-million-barrel rise.
Offsetting some of the build in gasoline and distillates, crude stockpiles fell by 5.2 million barrels in the week to June 4, the EIA said, versus a forecast decline of 3.5 million barrels.
“We need to start showing some strong weekly draw numbers on gasoline soon,” John Kilduff, founding partner at New York energy hedge fund Again Capital, said this week. “Otherwise WTI is going to get weighed down, even if crude stocks keep falling.”
Energy Markets Calendar Ahead
Monday, June 14
Private Cushing stockpile estimates
Tuesday, June 15
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, June 16
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, June 17
EIA weekly report on natural gas storage
Friday, June 18
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.