by The Traveling Investor
- Gold outperformed paper money over the long-term.
- There were multiple periods when gold failed to protect you from inflation.
- There is a relationship between gold and the change in inflation, but it doesn't mean much.
- Under current market conditions, I believe that gold positions should be trimmed.
One of the biggest fears of gold investors is inflation. It is said gold (NYSEARCA:GLD) stores value while paper money depreciates. An often cited piece of evidence is the depreciation of the dollar and the appreciation of gold. Purchasing power of the dollar has almost halved since 1990 whereas gold has more than tripled from $415 to $1354. Unfortunately, this should give you little comfort.
In chart above we can see that gold's appreciation has far outpaced inflation. It did not only "store value," but also provided a real rate of return. This is more than I can say for the dollar. However, this is only true over the long-term. There have been multiple periods when gold declined substantially despite positive inflation. For example, if you stashed $100 in some vault in 1990, you would have had $100 at the end of 1992. Sure, your purchasing power decreased by 13.3% thanks to inflation, but that's still better than the 19.8% decline experienced by gold. If you needed to cash out your gold in 1992, you would have suffered from the decrease in purchasing power as well, bringing the total real loss to -30%.
A strong trend has developed between gold and the change in inflation recently: