Many investors have historically turned to gold as a way to protect their portfolios from inflation and market downturns. Gold has become more accessible than ever before, and many investors have been pleased with its performance in recent years. However, while gold has served as a reliable investment in times of geopolitical uncertainty and inflation, it may not be a good long-term investment. With the current low inflation rates, it may be a good idea for investors who have made gains on gold to consider recycling those gains into a broader portfolio.
Gold has traditionally been seen as a diversifier and an inflationary hedge, but in a normalized economic environment, its value is less convincing. It is essentially a speculative holding with little economic value, as there is no nation that currently uses the gold standard for their monetary system. With inflation rates showing signs of coming down, the outlook for inflation hedges like precious metals is also diminishing.
The history of gold dates back to the Bretton Woods Agreement after World War II, where the dollar was pegged to gold and foreign currencies were pegged to the US dollar. However, this fixed exchange rate system could not last forever, leading to the establishment of fiat currency and the end of the gold standard. Since then, gold has primarily been used as a portfolio hedging tool to protect against economic volatility and inflation.
The primary argument against gold as a long-term investment is that it lacks economic utility. Unlike stocks, gold does not generate cash flow or offer dividends, making it fundamentally worthless from a financial standpoint. While gold’s scarcity does provide some value, it does not compare to the growth potential of companies in the stock market, such as the S&P 500 which has outperformed gold over the past two decades.
As the economy stabilizes and inflation rates normalize, it may be time for investors to reevaluate their inflation hedges and consider reallocating their investments. Companies have stabilized, interest rate cuts are expected, and the economy is returning to normalcy. In this environment, investing in assets with cash flow potential like stocks or bonds may be more beneficial than continuing to rely on gold as an inflation hedge.
For investors looking for alternative investments to gold, a broader commodity basket with more industrial applications may be a better option. Investing in companies involved in high-demand industries like infrastructure construction or oil and gas can provide exposure to commodities while also offering real earnings potential. Companies like Freeport McMoRan in the copper industry or Exxon and Chevron in the oil and gas industry may benefit from market tailwinds and provide opportunities for growth and returns for investors.