Is Gold Really An Inflation Hedge? Raoul Pal Declares Sector 'Created Zero Value In 40 Years'

Gold is often thought of as a safe haven asset and a hedge against inflation, and investors and speculators pile into the yellow metal at times of economic uncertainty. The precious metal, however, has not capitalized on its strength amid the current downturn.

Gold has lost about 4% in the year-to-date period, although the drop is not as severe as the declines seen in many other financial assets.

What Happened: The PHLX GOLD and SILVER SECTOR I XAU, comprising gold and silver mining stocks, has generated nearly zero returns over a 40-year investment horizon, noted economic expert Raoul Pal said in a recent Tweet. The real return, or the return adjusted for inflation, would have been even lower.

The index, a representative of gold and silver, therefore hasn’t offset inflation either, he added.

“This chart quite shocked me,” Pal said.

Why It’s Important: Market experts now don’t see gold as a particularly reliable hedge against inflation outside of multi-decade horizons.

“For most of the year, gold has exhibited virtually no correlation with daily or weekly moves in long-term inflation expectations,” BlackRock analyst Russ Koesterich said late last year, according to Smartasset.

JPMorgan analysts note that gold provides zero income and becomes attractive when bond yields are negative – a situation that comes to pass when inflation is high, particularly when central banks are losing control.

“But if inflation is high and central banks are increasing rates against a backdrop of robust growth, then real yields can rise – an environment that is usually more challenging for gold,” they said.

XAU closed Friday’s session down 2.50% at $104.07, according to Benzinga Pro data.

Photo: Courtesy of CoinDesk on Flickr