Gold not a reliable inflation hedge-study

Tue Feb 7, 2012 2:56pm GMT
 

By Natsuko Waki

LONDON Feb 7 (Reuters) - Gold prices have been too volatile to play a reliable role as a hedge against inflation, a study of financial assets over the past 112 years showed on Tuesday.

While inflation does not reduce gold's real value, it has no yield or income flow and the precious metal has given a far lower long-term return than equities.

In the period since 1900, gold gave a real return of 1.1 percent in sterling terms and its value fluctuated widely, the study published by Credit Suisse and London Business School's Elroy Dimson, Paul Marsh and Mike Staunton.

"Gold is the only asset that does not have its real value reduced by inflation. It has a potential role in the portfolio of a risk-averse investor concerned about inflation," it said.

"However, this asset does not provide an income flow and has generated low real returns over the long term. Gold can fail to provide a positive real return over extended periods."

The report said global equities, the best performers among different assets since the start of the 20th century with a 5.4 percent annualised return, beat inflation in the long run.

However, their returns may be more the result of equity risk premium, the reward for holding risky assets instead of risk-free government securities, than rising inflation.

Looking at the relationship between real return and inflation, the research found that equities were not that sensitive to inflation, compared with inflation linked bonds.   Continued...

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