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Article

Gold: Inflation Hedge and Long-Term Strategic Asset

Natalie Dempster and Juan Carlos Artigas
The Journal of Wealth Management Fall 2010, 13 (2) 69-75; DOI: https://doi.org/10.3905/jwm.2010.13.2.069
Natalie Dempster
is director of government affairs at the World Gold Council in London, U.K.
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  • For correspondence: natalie.dempster@gold.org
Juan Carlos Artigas
is an investment research manager at the World Gold Council in New York, NY.
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  • For correspondence: juancarlos.artigas@gold.org
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Abstract

Will today’s solution become tomorrow’s problem? An increasing number of investors are becoming wary about the outlook for price stability. What if central banks leave interest rates too low for too long or pump too much money into the economy? If they do, they risk making today’s solution into tomorrow’s problem: a sharp rise in inflation. If inflation does materialize, then traditional inflation hedges, such as gold, commodities, real estate, and inflation-linked bonds, are likely to outperform other mainstream financial assets. Gold has a long history as an inflation hedge: In the eight years between 1974 and 2008 when U.S. inflation was high (defined as CPI inflation exceeding 5%) gold rose by an average of 14.9% in real terms, outperforming other assets such as bonds, equities, and even other commodities. Still, some investors may be reluctant to add an asset intended to function primarily as an inflation hedge to their portfolio at this stage, as there are currently equally compelling reasons for inflation to remain low. This leads the authors to ask whether any of the four traditional inflation hedges can demonstrably enhance investors’ risk-adjusted returns even in a low-to-moderate inflation environment. Real returns are not, after all, the only means of assessing portfolio performance. The volatility of an asset’s returns and its interaction with other assets are also important. The authors also examine how gold has performed relative to the other three traditional inflation hedges, both individually and collectively, using a portfolio optimizer. They then explore whether a strategic case can be made for gold in the portfolio of an investor that already holds TIPS (inflation-linked bonds).

  • Copyright © 2010 World Gold Council. All rights reserved. Not to be reproduced or redistributed without permissiion.
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The Journal of Wealth Management: 13 (2)
The Journal of Wealth Management
Vol. 13, Issue 2
Fall 2010
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Gold: Inflation Hedge and Long-Term Strategic Asset
Natalie Dempster, Juan Carlos Artigas
The Journal of Wealth Management Jul 2010, 13 (2) 69-75; DOI: 10.3905/jwm.2010.13.2.069

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Gold: Inflation Hedge and Long-Term Strategic Asset
Natalie Dempster, Juan Carlos Artigas
The Journal of Wealth Management Jul 2010, 13 (2) 69-75; DOI: 10.3905/jwm.2010.13.2.069
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