One of the most widely touted inflation hedges isn’t acting quite the way investors had hoped.

Gold ETFs like the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU) are down 3.6% this year, even as inflation runs at its highest level in close to four decades.

That’s a disappointing outcome for investors, who have responded by pulling $3.8 billion out of the top 10 gold ETFs since the start of the year.

Gold has been sold as a commodity that preserves its value against inflation, yet if it can’t rise in an extraordinary year for inflation like 2022, it calls into question that entire thesis.

On an inflation-adjusted basis, gold prices reached their recent peak in mid-2020. Since then, they lost a quarter of their value. The record inflation-adjusted high for gold prices was seen in 1980, when inflation reached double digits.

Still Outperforming

Gold bulls argue that this year’s modest decline in gold prices is a good showing for the precious metal in the context of the significant declines seen in financial markets. The gold spot price has dropped 4.4% this year, as measured by the IAU compared to a 16% drop in the S&P 500 ETF Trust (SPY).

At their worst point, SPY and the iShares Core U.S. Aggregate Bond ETF (AGG) were down by 24% and 16.6%, respectively, on a year-to-date basis.

Still, unlike stocks and bonds, gold offers investors no yield, and its value primarily comes from its aesthetic properties and the collective belief that it’s something that’s valuable.

That conviction is still there, though it’s weakened in recent years as bitcoin and other cryptocurrencies entered the scene and stole some of gold’s appeal as a store of value.

Gold Up in Foreign Currencies

Gold advocates also argue that the gold market is global. While gold prices are down a little more than 2% this year in U.S. dollars, gold prices are up when translated into most other currencies.

In euros, gold is up around 6.6%; in pounds, it’s up 11.2%; and in yen, it’s up 17.9%. So anyone holding gold or gold ETFs outside of the U.S. is probably pretty content with their performance.

Still, gold has shown this year that it’s too inconsistent and volatile to be an inflation hedge. While you could make the case that it’s maintained much of its value over very long periods of time—multiple decades or even centuries—it doesn’t necessarily do so over the time periods investors care about: months, years or even a few decades.

A more reliable inflation hedge would be the Treasury inflation-protected securities you find in ETFs like the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), which compensate investors directly based on the consumer price index.

And for multiyear periods, you might as well invest in assets that can not only hold their value against inflation but grow their value against inflation—like stocks.

Follow Sumit Roy on Twitter @sumitroy2

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