As Inflation Holds Steady, Gold’s Ready
May 09, 2024
Read Time 3 MIN
Inflation remains high, and the US economy is slowing. It’s time for investors to allocate to real assets like commodities and gold.
Remember the argument that “inflation is transitory”? My best inflation protection over the past few years would have been to take one dollar from every inflation denier every time they argued that inflation won’t happen, won’t last or some permutation of both.
Our macro theme is stagflation. And from our perspective, the data is telling us that we’re going to be correct. The U.S. economy is slowing (GDP is at 1.6%) and inflation is not (CPI is at 3.5%). Expect the market ride to get bumpier as investors adapt to the current environment. In reaction, Fed Chair Powell stated, “Recent data has clearly not given us greater confidence that inflation is coming fully under control and instead indicates that it's likely to take longer than expected to achieve that confidence.”
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Investors have a terrible habit of overcomplicating simple problems, so let’s start with a few basics:
- Since February 2020, the supply of money has increased by over 40%, which helped spark inflation.1
- High inflation regimes have historically persisted a very long time.
- High interest rates, coupled with an extreme public debt burden and insatiable government spending, will cause instability, more money creation, and will likely perpetuate inflation.
We have been loudly warning about persistently high inflation and the need for inflation protection since 2021. Over the last few years, and as we expected, inflation has refused to dissipate, to the dismay of politicians, market experts and investors. Given the current economic, geopolitical and, perhaps most importantly, supply/demand dynamics of commodity markets, the message remains steadfast: Hoping and ignoring will not solve anything. Diversifying into real assets is the solution. Why?
High inflation, by definition, is a purchasing power problem. When fiat currencies experience excess supply, assets with scarcity increase in value. Some of the best examples of scarce assets are gold, commodities, natural resource equities, real estate, and infrastructure, which make up 100% of the VanEck Inflation Allocation ETF (RAAX) portfolio.
RAAX | VanEck Inflation Allocation ETF
Our top pick for hedging inflation in today’s environment are commodities—with a special emphasis on gold, historically the top performing asset as the economy approaches the late stages of the inflationary cycle. In the 1970s, like today, gold investors needed patience. During the first half of the inflation cycle of the 1970s, gold kept pace with commodities, as both outperformed stocks.
Gold Keeps Pace Through First Half of the 1970s Inflation Regime
Source: Bloomberg.Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
Five years later, as investors realized and finally accepted that inflation was “sticky”ing around, they flocked to gold to protect their purchasing power, and sent it soaring.
Gold Climbs Higher in Second Half of the 1970s Inflation Regime
Source: Bloomberg. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
This rhymes with the current market dynamic. It is now three years since the Fed woke the sleeping inflation giant and key real assets are amongst the top performing assets.
| Real Assets Among Performance Leaders: 4/30/2021 – 4/30/2024 | |
| Total Return | |
| Gold ($/ounce) | 29.23% |
| S&P 500 Index | 26.13% |
| Bloomberg Commodity Index | 23.17% |
| Bloomberg Barclays US Aggregate Bond Index | -10.24% |
Source: Bloomberg, as of 4/30/2024.
We expect the price of gold to climb much higher from here and surprise even those that are bullish on the shiny metal.
In conclusion, the late stage of the inflation cycle has arrived, which, historically, features additional (and longer than expected) upward pressure on prices, high interest rates, slowing economic activity, and attractive returns on assets with scarcity. As such, our allocations to commodities and gold are on the rise and so should yours.
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DISCLOSURES
1 Source: Bloomberg, as of March 2024.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Consumer Price Index (CPI) is an index of the variation in prices paid by typical consumers for retail goods and other items.
Bloomberg Commodity Index is made up of exchange-traded futures on physical commodities, representing 21 commodities which are weighted to account for economic significance and market liquidity.
Bloomberg Barclays U.S. Aggregate Bond TR Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit https://www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
VanEck Inflation Allocation ETF (RAAX): An investment in the Fund may be subject to risks which include, among others, risks related to investing in real assets ETPs, which may subject the Fund to commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, ETP-related equity securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, ETP-related foreign currency, credit, interest rate, call, concentration and derivative risks, all of which may adversely affect the Fund. The Fund may also be subject to fund of funds, affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), cryptocurrency, cryptocurrency tax, liquidity (with respect to commodities instruments), gap, cash transactions, high portfolio turnover, models and data, active management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non-diversified risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© 2024 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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DISCLOSURES
1 Source: Bloomberg, as of March 2024.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Consumer Price Index (CPI) is an index of the variation in prices paid by typical consumers for retail goods and other items.
Bloomberg Commodity Index is made up of exchange-traded futures on physical commodities, representing 21 commodities which are weighted to account for economic significance and market liquidity.
Bloomberg Barclays U.S. Aggregate Bond TR Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit https://www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
VanEck Inflation Allocation ETF (RAAX): An investment in the Fund may be subject to risks which include, among others, risks related to investing in real assets ETPs, which may subject the Fund to commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, ETP-related equity securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, ETP-related foreign currency, credit, interest rate, call, concentration and derivative risks, all of which may adversely affect the Fund. The Fund may also be subject to fund of funds, affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory (with respect to investments in the Subsidiary), tax (with respect to investments in the Subsidiary), cryptocurrency, cryptocurrency tax, liquidity (with respect to commodities instruments), gap, cash transactions, high portfolio turnover, models and data, active management, operational, authorized participant concentration, no guarantee of active trading market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non-diversified risks. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© 2024 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.