As Talk Turns to Inflation, Some Investors Look to Gold

Inflation is back in the news and so, of course, is interest in gold.

After years of dormancy, inflation is expected to rise a bit this summer. It is even possible that as Americans emerge from Covid-19 induced seclusion, their pent-up demand will overheat the economy and weaken the dollar.

Those concerns have put the spotlight on gold, which has long been viewed as a hedge against inflation, a declining dollar and an unstable stock market. Buy gold now and make a quick profit, or so the thinking goes.

But this analysis has problems, starting with the outlook for inflation, which isn’t necessarily that bad. The inflation rate ended 2020 at an anemic 1.4 percent, and Jerome H. Powell, the Federal Reserve chair, has said that despite the potential for a modest surge above 2 percent this summer, the Fed doesn’t expect inflation to move much higher between now and 2023.

Perhaps that’s why gold hasn’t been soaring lately, either. After peaking at more than $2,000 an ounce last summer, gold prices hovered below $1,750 in early April, a decline of nearly 13 percent.

In short, betting on gold for the short term is risky.

That doesn’t mean individual investors need to dismiss the idea of holding it, and precious metal funds, entirely. But it suggests that they should be exceedingly careful and take a very long view, several strategists said.

“For investors who are looking for a hedge in their portfolio, commodities in general and gold specifically can be a good play,” said Katerina Simonetti, senior vice president at Morgan Stanley Private Wealth Management in Philadelphia. “The goal is to ensure positive long-term performance at a lower level of risk.”

The returns of gold funds have been volatile, though positive for many extended periods. The SPDR Gold Shares E.T.F. from State Street Global Advisors posted a total return of 23.68 percent for 2020, but it was down more than 9 percent this year through March. It returned 8.98 percent over three years and 6.4 percent for five years.

Performance for the iShares Gold Trust E.T.F. is similar: down more than 9 percent through March, after total returns of 23.87 percent in 2020, and 6.52 percent for five years. Both funds provide a way for shareholders to invest in gold bullion without ever needing to buy or secure it.

Gold mutual funds, on the other hand, which also invest in gold bullion, also often hold interests in companies involved in gold mining. That exposes shareholders to equity risk, in addition to the intrinsic risk of making bets on gold prices.

The Gabelli Gold Fund (class A) was down more than 15 percent through March, after returning more than 26 percent last year. The fund’s annualized return is 12.86 percent for three years and 10.11 percent for five years. The Fidelity Select Gold Portfolio follows the same trend: down this year after annualized returns of 26.85 percent last year, 12.06 percent for three years and 9.27 percent for five years.

Skeptics point out that gold can be a drag on a portfolio. Investors must time purchases and sales — a notoriously difficult task even for professionals. Otherwise, for long periods, gold prices can remain nearly flat, as they did for more than a decade from the mid-1980s to 2000, and they can decline. In addition, gold doesn’t pay dividends or interest: “It just sits there,” as Warren E. Buffett likes to point out. Finally, investors who buy physical gold face the additional risk and cost and of securing their bullion or coins.

A more cautious approach is to avoid chasing returns. Instead, keep a small percentage of a portfolio in gold and other precious metals in the hope that this will be a long-term stabilizer.

“In a world where equity prices continue to elevate untethered to any fundamentals, precious metals as a small amount of diversification makes sense,” said David Trainer, chief executive of New Constructs, an investment research firm based in Nashville.

George Milling-Stanley, chief gold strategist at State Street Global Advisors, said gold offers two benefits over the long term: protection against risk and volatility, and as asset appreciation.

“Gold is a defensive asset that really comes into its own over the long term, when you can enjoy the return stream,” Mr. Milling-Stanley said.

As for gold working only as a hedge against inflation, Mr. Milling-Stanley pointed out that since 2001, inflation has been restrained, rarely rising above 3 percent annually and remaining around 2 percent or less most of the time. Gold prices, however, rose from $274 an ounce at the beginning of 2001 to about $1,750 at the end of March.

“We don’t need inflation,” Mr. Milling-Stanley said. Gold performed well anyway.

Some experts recommend investors stick to E.T.F.s that focus strictly on gold, which tends to lead the other precious metals, silver and platinum. Advisers warn that gold, precious metals and other commodities should make up just a sliver of an individual’s portfolio, usually no more than a total of 5 percent.

Whatever its drawbacks as an investment, gold has had an enduring appeal.

“There is a psychological component in owning gold that goes back for centuries,” Ms. Simonetti said. “It’s an asset that gives peace of mind to investors. It just makes investors feel safe and secure.”