The Case for Gold
How Inflation is Poised to Stay High, for a long time
The U.S. economy is exhibiting multiple indicators pointing toward a sustained period of structurally high inflation. Even before recent policy changes, inflation had proven persistent, driven by factors such as a tight labor market, rising wages, substantial fiscal stimulus during the pandemic, and ongoing supply chain disruptions. These conditions have collectively sustained upward pressure on prices across key sectors, including housing, healthcare, and services, making inflation a more entrenched feature of the economy.
Recent tariff increases on a range of imports will almost certainly intensify these inflationary pressures. As businesses face higher input costs, many are expected to pass these expenses on to consumers. In effect, these trade policies may act as an additional inflationary force, reinforcing an already challenging pricing environment and increasing the likelihood that elevated inflation becomes a longer-term issue.
Moreover, the U.S. dollar has been falling in value lately, and the timing has raised eyebrows. Online discussions are growing around "dedollarization" — the idea that other countries are moving away from using the dollar in global trade and reserves. If the dedollarization trend truly becomes structural, it poses a major threat to the dollar’s role as the world’s go-to currency. A weaker dollar also makes imported goods more expensive, which adds even more fuel to inflation at home.
The time to prepare investment portfolios for a period of prolonged high inflation is now.
Implications for Investors: Inflation and Portfolio Volatility
Inflation has serious ramifications for investors:
Inflation diminishes purchasing power and reduces real investment returns.
Equity markets tend to experience heightened volatility during inflationary regimes.
Historical evidence suggests that gold has outperformed and helped portfolios maintain purchasing power and keep pace with inflation.
Incorporating gold into many portfolios has proven effective when inflation runs high. While gold tends to underperform stocks during stable economic periods with low inflation, it performs very differently when inflation is high. The 1970s provide a compelling historical example.
A Historical Reference: The Drivers of 1970s Inflation
The inflationary surge of the 1970s was driven by a perfect storm of economic and policy shifts: sharp energy price spikes from the 1973 and 1979 OPEC oil embargoes, overly accommodative Federal Reserve policy that kept interest rates too low, expansive government spending mainly tied to the Vietnam War, and the collapse of the Bretton Woods system after President Nixon ended the dollar’s gold convertibility in 1971—ushering in a freely floating, and increasingly inflation-prone, U.S. dollar.
Backtesting the Role of Gold: 1972-1981
To quantify gold's role in an inflationary environment, I conducted a backtest covering the period from 1972 to 1981—the earliest range for which reliable gold price data is available. This 10-year window was selected to capture the full arc of the inflationary cycle and to provide an objective comparison between portfolios with and without gold.
It’s worth noting that gold was $35 per ounce in 1971. From there, it embarked on a dramatic upward trajectory:
Peak price: In January 1980, gold reached $850 per ounce.
As inflation finally subdued in the early 80s, it fell to $460 per ounce in Dec. 1981.
Even with the decline from $850 to $460, gold provided solid returns for investors.
This historical performance offers an actionable framework for managing portfolios in high-inflation environments—demonstrating the value of strategic diversification with real assets like gold to enhance resilience and preserve capital.
In summary, during periods of elevated and persistent inflation, gold has historically served as a valuable hedge, improving portfolio stability and offering protection against macroeconomic shocks.
Backtest - 1972-1981
This historical backtest, spanning 1972 to 1981, evaluates the impact of adding gold to a U.S. equity portfolio during a high-inflation environment. The results demonstrate that even a modest 10% allocation to gold meaningfully improved portfolio performance and risk characteristics compared to a 100% equity-only strategy. Increasing the gold allocation to 20% further enhanced these benefits. Importantly, this analysis provides a practical illustration of how incorporating gold can support long-term investment objectives during inflationary cycles.
Key Metrics:
Returns:
Annualized return improved from 7.2% (100% US stocks) to 10.2% (90% US stocks / 10% gold).
And improved further to 12.8% (80% US stocks / 20% gold).
A $10,000 investment would have grown to $20,124 with a 100% allocation to U.S. stocks, $26,396 with a 10% gold allocation, and $33,423 with a 20% gold allocation (66% higher than 100% US stocks)
100% U.S. Stocks were negative after factoring in inflation.
Risk:
Maximum drawdown reduced significantly from -46% (100% US Stocks) to -34% (90% / 10%) and -27% (80% / 20%).
Annualized standard deviation slightly decreased slightly from 16.9% to 15.4% (90% / 10%) and 14.9% (80% / 20%).
Risk-Adjusted Returns (Sharpe Ratio)
Significant improvement in risk-adjusted returns from 0.03x in the stock-only portfolio to 0.20x in the 90% / 10% mix
… to 0.36x in the 80% / 20% mix.
A portfolio with either a 10% or 20% allocation to gold and the remainder in U.S. equities can be a suitable allocation for investors with a time horizon of at least 10 years, particularly those seeking a more resilient allocation in inflationary regimes.
General Disclaimer
The information provided through this subscription service is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. The content is general in nature and does not take into account your individual circumstances, financial situation, or investment objectives.
You are solely responsible for determining whether the information provided is appropriate to your individual circumstances and risk tolerance.
The publisher is not a registered investment adviser, broker-dealer, or fiduciary under federal or state securities laws. Users of this service are solely responsible for their own investment decisions. It is strongly recommended that you consult with a qualified financial professional before making any investment decision.
Past performance is not indicative of future results. While the information provided is believed to be reliable, no warranty is made as to its accuracy, completeness, or timeliness. All statements and opinions are current as of the date of publication and are subject to change without notice.
Backtest Disclaimer
This backtest is imperfect. The model assumes annual rebalancing with all dividends and interest reinvested. It does not account for investor behavior, timing decisions, or real-world trading frictions. Backtested results are subject to inherent limitations, including survivorship bias, look-ahead bias, and data-mining bias, and should not be interpreted as a guarantee of future performance. It’s based on data from www.portfoliovisualizer.com. The benchmark used for comparison is a blended index composed of Portfolio Visualizer’s US Stock Market and Gold Indexes or Proxies which is unmanaged and not available for direct investment. The benchmark and model may differ in allocation methodology, rebalancing frequency, and underlying asset composition. This backtest excludes the impacting of fees and trading costs, which reduce returns.