Precious Metals

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>>> Why Gold Isn't Protecting You From Runaway Inflation This Time


Investor's Business Daily

by MATT KRANTZ

11/11/2021


https://www.investors.com/etfs-and-funds/etfs/gold-etfs-isnt-protecting-you-from-runaway-inflation-this-time/?src=A00220


Red-hot inflation is supposed to light up gold prices. But gold ETFs are lagging, though, some think that's about to change.

The giant $56.1 billion-in-assets SPDR Gold Trust (GLD) is down 3.2% this year. That's surprising as all signs of inflation are heating up to epic levels. The consumer price index, a key measure of rising prices, finished off the charts in October. The core inflation rate, excluding food and energy, jumped to 4.6%, which is a 31-year high. And prices jumped 6.2% from a year ago, the largest gain since 1990.

But if you think hiding out in gold will save you, you've been wrong.

"Gold is poised to suffer its first calendar year loss since 2018 as it hovers around $1,800 an ounce," said Jack Ablin, strategist at Cresset Capital Management. "It appears the inflation hedge and store of value has been largely forgotten in a year when the theoretically "transitory" inflation flare-up now appears to be longer lasting."

Why Isn't Inflation Shining Gold ETFs?

Gold ETFs are down across the board. All the majors, including also $27.4 billion in assets iShares Gold Trust (IAU) and $3.9 billion-in-assets SPDR Gold MiniShares Trust (GLDM) are off just as much as SPDR Gold Trust.

Some are down even more. The Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI) is down 10.9% just this year as it uses an option strategy to magnify moves. And that's working against it now.

Adding to the pain of owning gold is this: Just about every other asset is jumping higher. The SPDR S&P 500 ETF Trust (SPY) is up nearly 24% this year. Real estate, another hedge against inflation, is doing better, still. The Vanguard Real Estate ETF (VNQ) is up 29.4% this year. And what some think of as the "new gold," Bitcoin, is doing even better. The Grayscale Bitcoin Trust is up roughly 70% this year.

Why isn't gold rallying? After all, the price of the yellow metal is supposed to at least keep up with inflation. Ablin says the strong traditional linkage of gold prices to inflation-adjusted Treasury rates is "disconnected" this year. For now.

Don't Blame Bitcoin For Gold ETF's Woes

It's widely thought gold is simply losing its allure with a new class of investors who prefer cryptocurrencies for inflation hedges.

But that's a folly, Ablin says. "We don't expect them (cryptocurrencies) to displace gold as an inflation hedge," he said. Bitcoin's volatility is seven times higher than gold's, he says. And it suffered 50% crashes four times in just the past five years. "That doesn't sound like a safe haven store of value," he said.

Gold, though, is positioned to do better, Ablin says. More than $10.5 trillion is invested in gold worldwide. And roughly 20% of that is held in bars and coins. Just a small move into gold by institutions "could be the catalyst to drive prices higher," Ablin said.

It usually takes "many months" of inflation north of 5% for demand for gold to kick in, says George Milling-Stanley, chief gold strategist at State Street Global Advisors. "Right now, we have seen inflation at an elevated level for just a few months," he said.

More Inflation Coming?

Inflation might only be getting started, too. Inflation spiked to roughly 15% in the late 1970s, says Sam Stovall, market strategist at CFRA. And inflation ended the 1980s at 12.4% and the 1990s at 6.3%. Interestingly, the only decade since the 1950s the S&P 500 posted a negative compound annual growth rate, 2.7%, was in the 2000s when inflation only averaged 2.4%, Stovall says.

Where can ETF investors hide? Stovall found S&P 500 growth stocks to be the top performers in periods of rising inflation. They rose 0.93% a month on average during these periods. Next best? Information technology stocks with a 0.81% average monthly gain followed by 0.74% by energy stocks, Stovall says.

Some say, though, gold holds an important place in portfolios. "Gold has returned 405 basis points per annum more than inflation and 336 basis points per annum more than Treasury bills during the last half century, while the U.S. dollar has lost over 90% of its purchasing power in the past 50 years," said Ashraf Rizvi, CEO of Gilded. "These are compelling realities."

So don't entirely rule out gold, says Juan Carlos Artigas, global head of research at the World Gold Council.

"Looking ahead, we believe there is a considerable risk that higher inflation may persist as a by-product of knock-on effects from the monetary and fiscal policies enacted in response to the Covid-19 pandemic which is likely to support investment demand for gold," he said.

Gold ETFs Not Golden Now

Spiking inflation isn't helping gold prices, yet


ETF Symbol Assets ($ billions) ytd ch.

SPDR Gold Trust (GLD) $56.1 -3.2%

iShares Gold Trust (IAU) 27.4 -3.1

SPDR Gold MiniShares Trust (GLDM) 3.9 -3.1

Aberdeen Standard Physical Gold Shares (SGOL) 2.3 -3.0

GraniteShares Gold Trust (BAR) 1 -3.0

VanEck Merk Gold Trust (OUNZ) 0.4 -3.0

Goldman Sachs Physical Gold (AAAU) 0.3 -3.0

Invesco DB Gold Fund (DGL) 0.09 -4.1

Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI) 0.08 -10.9

Pacer iPath Gold ETN (GBUG) 0.04 -3.4

Sources: IBD, S&P Global Market Intelligence, ETF.com through Nov. 10

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