Question #2 - Is gold a good investment during inflationary times?

It seems like I’ve been hearing and seeing more ads on “invest in gold during inflationary times.” Like almost any strong statement I hear, my brain does not go to “I should do that!”, but rather, “is that true?”

So, I thought I should set out to answer the question. Looking at these investment questions always reminds me of why so many smart people don’t self-direct their own savings. It is so much more complicated than it needs to be!

First, what is an inflationary time? I decided to use the US CPI numbers as a guide. Specifically, I look at months where CPI grew greater than 3% on a year-over-year basis. CPI seems like the best measure because it most closely tracks pocketbook spending. The 3% number because it is 50% higher than both the US and Canadian central bank targets of 2% (and I think this is true for most OECD central banks). The first month where CPI inflation of >3% YoY growth was April 2021 and continues through November 2023, the last month for which data is available.

Next up… buying gold, at least in small amounts, is not easy. I picked a gold tracking ETF with low management fees for this reason. AAAU was the choice because the symbol is pretty awesome. What to compare gold to? The two most obvious investment vehicles to me were the general stock market (I used the VOO ETF because it tracks the S&P 500 and has low management fees) and keeping cash in a pillow. A third choice could have been some savings vehicle, but they paid next to nothing for the first half of this time period anyway.

With that backdrop, I went to Yahoo Finance for VOO and AAAU information and came up with the following:

The columns are:

Date - as of month end
CPI - consumer price index
AAAU - closing price of AAAU
VOO - closing price of VOO
Dividend dollars - dividend yield - I opted to not reinvest, take the cash using and putting it into the VOO total rate of return using the returning DD field through the VOO (including dividends) column. I could have calculated this in Tableau Prep but wanted to keep it simple.
EPP dollars - the effective purchasing power of a dollar, taken by reducing the impact CPI is having on the money. Again, I could have used Tableau Prep to do this. I could have also down it in Tableau Desktop using a table calculation but it would have been tricky to use in my other calculations in the dual axis chart.

Taking this Excel file into Tableau, I created calculations for both AAAU and VOO to adjust them for the purchasing power they had as a result of CPI changes monthly. That is, it wouldn’t be fair to show their growth without adjusted for purchasing power:

[VOO (including dividends)] * [Purchasing Power]

Then, for each, I had Tableau consider the changes as I plotted them monthly:

1+

(ZN(SUM([CPI Adjusted VOO])) -

LOOKUP(ZN(SUM([CPI Adjusted VOO])), FIRST()))

/ ABS(LOOKUP(ZN(SUM([CPI Adjusted VOO])), FIRST()))

Finally, I plotted them monthly over the inflationary months to find that VOO would have been a better choice than gold. In this window, gold isn’t a great investment in inflationary times.

* I didn’t consider tax implications of selling either ETF because… well… it would have been impossible without knowing the type of accounts where the ETFs were held, if they were being sold, the margin tax rate of the individual selling, etc.