Financial Opinion and Insights

Inflation’s Coming! Buy Gold, Right? Maybe Not.

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

We’ve heard it a hundred times.  It’s in all those TV commercials:  Gold is an inflation hedge!  If you’re worried about hyper-inflation, you should buy gold now!

True?  Is gold really linked to inflation?

History simply doesn’t bear that out.

Look at the last ten years:  Almost zero inflation.  If gold were linked to inflation, gold prices would have been flat.  But, gold prices moved higher, as did the stock market.  Few would say gold is linked to the stock market.

Maybe, with interest rates low and unemployment high, gold was linked to something else:  Fear.

Maybe gold is linked to the dollar!  After all, the dollar has been getting weaker for years; maybe that’s why gold prices have been going up.

That doesn’t appear to make sense, either.  If that were true, the price would have been declining against the other currencies that have been getting stronger; but, that hasn’t been the case.  Gold has been appreciating against all currencies, even those that have been getting stronger.

Many investors have short memories; it’s called a `recentcy bias’, attaching more importance to a recent event than one that happened long ago.  Few remember when gold prices went through 25 years of year-to-year negative returns.  The `that-was-then-this-is-now’ mentality is exactly why people buy into investment environments only after they’ve seen a run-up and are then convinced it will continue.

Does it make sense to own gold?  Probably.   Gold, like most investment vehicles, can be used as a risk diversification tool due to its correlation characteristics.   Most IFG clients are urged to maintain a 5% allocation to commodities, which include precious metals including gold.

If you’re not using gold as a part of your allocation, you may want to talk to your financial advisor.



Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.