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Structure Matters: Inflation and Gold

Posted by Dan Weiskopf, ETF Professor on Jun 22, 2022 10:30:00 AM
Dan Weiskopf, ETF Professor
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Gold, on a relative basis, has performed well this past year. GLD as an example is up 3.27% versus the decline of 12.77% by the S&P500. Conversely, since it has underperformed relative to soft commodities such as Corn, Soybeans and Wheat, some people seem to question whether gold is in fact an inflation hedge. Arguably, this is a function of what you use as your input in tracking inflation, which at 8.6% may be an extreme number. The strength of the US dollar is perhaps the biggest issue. To this point, Mike McGlone, the Bloomberg Intelligence Commodities Strategist, points out that since gold is not breaking out and near all-time highs like inflation, it is useful as a currency debasement tool and a true diversifier. He highlights that in terms of yen (2.7% away) and pounds (4.7% away), it is close to new highs. Frankly, these days anything close to a new high would seem to be a homerun.

Regardless of this question, it is worth noting that global gold ETFs have taken in some $9 billion in the first five months of 2022. Clearly, some people are making the bet that gold will do its natural thing. Those paying attention to the ETF Think Tank will note that we have hosted Twitter Spaces with Axel Merk and his Team at Merk Investments (ASA) and canvassed the role that gold plays in this investment environment. Similarly, we have also hosted interesting discussions with WisdomTree on Twitter Spaces on the macro conditions and the potential tokenization of gold. Whoever owns gold directly may be squeamish about such an opportunity, but at Consensus2022, it became clear that such innovation has legs despite what some people might say is a cultural dichotomy. Glad to see innovation remains alive and well at WisdomTree.

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Hiding in Gold as a Diversifier

Ironically, few asset classes have provided a place to hide under current market conditions, so diversification is arguably a home run. The question, however, is what will happen if the dollar weakens. Will that be the catalyst that leads to a breakout in gold? A weak dollar could also signal further weakness in equities, so this could be pivotal to the portfolio value of the price action of a breakout. How you play it is a different question and one that involves how “structure matters.” Either way, we think Mike McGlone’s work is something that should be followed closely on Twitter, and we also plan to host him on Twitter Spaces at 5pm on Tuesday June 28th.

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Summary

Gold is an asset class long believed to be correlated with inflation. It is for this reason some investors have been disappointed by its performance relative to 8.6% inflation. Long-term investors may just need patience or be measuring it against the right currency. Moreover, if the US Dollar ever weakens – buckle up and put your structure matters thinking cap on! The miners may rock!

 

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Topics: Weekly Research, Structure Matters

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