Shares of gold stocks, like Barrick Gold (NYSE:GOLD), VanEck Gold Miners (NYSEMKT:GDX) exchange-traded fund (ETF) and the SPDR Gold Trust ETF (NYSEMKT:GLD), all closed up higher today following the release of the Consumer Price Index (CPI) report. The report revealed that inflation rose by 8.6% year-over-year (YOY) in May, the highest increase in more than 40 years. Energy prices soared higher by 34.6% YOY, while shelter costs rose at its fastest YOY pace in 31 years.
Meanwhile, the price for a troy ounce of gold sits near $1,870. At the beginning of the year, the price was about $1,800.
So, what does inflation have to do with gold? Let’s get into the details.
Why Are Gold Stocks Up Today?
It’s undeniable that the U.S. is experiencing high inflation. But commodities like gold have performed well historically during uncertain times. In addition, many investors view gold as a hedge against inflation.
Famed hedge fund manager David Einhorn believes gold may be a solid investment. At the Sohn Investment Conference, he explained:
“When countries don’t trust each other over bonds, and currencies, gold becomes the ultimate reserve asset. Gold as a percentage of total reserves remains staggeringly low. The question is whether there’s enough gold to back the currency reserves? The answer is for the price of gold to go higher, perhaps much higher.”
On the other hand, equities have outperformed gold over the long term. Since August of 1971, the S&P 500 has returned an annualized return of 11.2%, beating out gold’s return of 8.2%. Over the past 40 years, the S&P 500 has averaged an annual return of 12.2%, outperforming gold’s return of 3.6% by more than three times. That doesn’t mean that you shouldn’t add gold to your portfolio, though. The precious metal’s low correlation with the S&P 500 and treasuries can make it an investment that reduces volatility over time.
At the end of the day, gold is seen as an asset that is not correlated with the general market. However, this relationship does not always hold true. During the March 2020 coronavirus crash, GDX declined by 39%, worse than the S&P 500’s decline of 34%. Meanwhile, interest for gold as a hedge against inflation may be lower due to the popularity of cryptocurrency.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
