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Image shows gold bars stacked on top of each other. Gold has long been viewed as a way to hedge against inflation, but a BlackRock portfolio manager says you should rethink that position.

The rising price of goods and services has been one of the inescapable realities of the COVID-19 pandemic. Inflation hit 5.4% in June, a level not seen in the U.S. for nearly 13 years, and remained there in September. Whether today’s inflationary environment is a result of supply chain disruptions caused by COVID-19, government stimulus or both, inflation has investors seeking ways to preserve their purchasing power.

A financial advisor can help you protect your assets from inflation. Find an advisor today.

While gold has traditionally been viewed as a powerful hedge against inflation, Russ Koesterich of BlackRock says investors may want to lower their exposure to gold and look elsewhere, including silver and cyclical equities, when hedging against inflation.

Is Gold No Longer an Inflation Hedge?

Image shows an inflation graph. Gold has long been viewed as a way to hedge against inflation, but a BlackRock portfolio manager says you should rethink that position.

Koesterich, a chartered financial analyst and portfolio manager of BlackRock’s Global Allocation Fund, points to gold’s recent lackluster performance as a reason to question its status as an inflation hedge.

The precious metal, which historically has maintained its value even as fiat currency dropped in worth, is down 7.2% in 2021 as of Nov. 5. The Dow Jones Industrial Average, meanwhile, has risen nearly 19% during the same time.

“Despite the pickup in inflation, gold is still struggling with several headwinds,” Koesterich wrote. “While growth is decelerating, it is likely to remain above trend in the coming quarters. Given historically low real yields and strong growth, the next move in real interest rates (i.e. the rate after inflation) is more likely to be up than down, a headwind for gold.”

That’s not to say that gold hasn’t been an effective inflation hedge in the past. With less volatility than other asset classes, gold also has a long track throughout human history of holding value.

“But while gold holds its own over the very long term, it is not a particularly reliable hedge outside of multi-decade horizons,” Koesterich wrote. “For most of the year gold has exhibited virtually no correlation with daily or weekly moves in long-term inflation expectations.”

The World Gold Council even noted in July that the precious metal has a “surprisingly poor” correlation to the Consumer Price Index. Since the 1980s, there has only been one time when gold has posted strong returns amid surging inflation (4% or more): a short period between 2007 and 2008 during the World Financial Crisis, according to the World Gold Council.

Alternatives to Gold

Image shows an electrical worker standing before power lines. Gold has long been viewed as a way to hedge against inflation, but a BlackRock portfolio manager says you should rethink that position.

So if gold isn’t recommended as a primary inflation hedge, how can you protect your portfolio’s purchasing power? Some point to Bitcoin and other cryptocurrencies. While Bitcoin has experienced increased adoption, its volatility and relatively short track record cloud its status as an inflation hedge, according to Koesterich.

Another precious metal, silver, may be a better asset for hedging against inflation, Koesterich wrote. Silver has more industrial uses than gold, being used in the production of electronic devices, electrical systems and solar panels. With more demand for silver, the metal stands to rise higher than gold during times of inflation, according to analysis from Morgan Stanley.

But silver also hasn’t fared particularly well over the last year. On Nov. 13, 2020, silver traded at $24.69 per ounce, slightly higher than its price tag on Monday, $24.48 per ounce.

Beyond gold and silver, Koesterich points to cyclical sectors, including energy, as perhaps the most effective way to hedge against inflation.

“Instead, today’s best hedge is arguably one of the simplest: cyclical equities able to maintain pricing power,” he wrote. “While gold has not kept up with rising inflation expectations, many cyclical industries – including energy, materials and select consumer names – have.”

Energy has certainly outperformed many sectors of the economy amid the rise in inflation. The Vanguard Energy ETF, which tracks the stocks of various energy companies, is up 118% over the last year. Meanwhile, the largest energy ETF by market cap, the Energy Select Sector SPDR Fund, has gained 104% in the same time.

Bottom Line

With the price of goods and services spiking in 2021, investors may be seeking ways to perverse the purchasing power of their portfolio. While gold has historically been seen as a store of value, BlackRock’s Russ Koesterich notes that the precious metal has not performed well this year. Silver and cyclical equities, including energy stocks, may offer better returns for inflation-conscious investors.

Tips for Hedging Against Inflation

  • Investors interested in adding precious metal exposure to their portfolios can purchase physical metals, invest in ETFs and mutual funds that deal in gold, silver and other commodities or even invest in mining companies.
  • A financial advisor can help you guard against inflation by purchasing Treasury inflation-protected securities (TIPS) and other assets to weather economic uncertainty. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.

Photo credit: ©iStock.com/brightstars, ©iStock.com/JLGutierrez, ©iStock.com/zhengzaishuru

Patrick Villanova, CEPF® Patrick Villanova is a writer for SmartAsset, covering a variety of personal finance topics, including retirement and investing. Before joining SmartAsset, Patrick worked as an editor at The Jersey Journal. His work has also appeared on NJ.com and in The Star-Ledger. Patrick is a graduate of the University of New Hampshire, where he studied English and developed his love of writing. In his free time, he enjoys hiking, trying out new recipes in the kitchen and watching his beloved New York sports teams. A New Jersey native, he currently lives in Jersey City.
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