NEW YORK (Dow Jones)--Gold prices may, in some cases, perform more strongly than other traditional inflation hedges in times of rising prices, an industry group study released Wednesday said.
"If inflation does materialize, then traditional inflation-hedges like gold, commodities, real estate and inflation-linked bonds are likely to outperform other mainstream financial assets," said the report by the World Gold Council, a marketing organization funded by gold mining companies.
"Gold can be shown to enhance an investors' risk-adjusted returns even in a low to medium inflation environment," said the report, written by Natalie Dempster, head of investment for North America, and Juan Carlos Artigas, investment research manager.
With some investors worried about a resurgence in inflation because of aggressive government policy responses to deal with the financial crisis and tentative signs that the worst of the recession might be over, the study examined the relative performance of gold, commodities in general, real estate and inflation-linked bonds.
The study compared the real or inflation-adjusted returns of assets representing these four classes - the spot price of gold at 5 p.m. in New York; the S&P GSCI commodity index spot price; the Bloomberg Real Estate Investment Trust Index; and Barclays' Aggregate US Treasury Inflation-Protected Securities Index - over three time periods.
In the first period, between January 1974 and May 2009, the nominal gold price rose from $129.19/oz to $979.15/oz, an increase of 658%, compared with a 997% rise in the S&P GSCI. Adjusting for the 357% cumulative increase in the US consumer price index over the same period, gold rose by 66.6%, while the S&P GSCI rose by 141.1%.
This equates to an annualized real return in the gold price of 2.0% and an annualized real rise in the S&P GSCI of 2.8%.
Over the second period, December 1993 to May 2009, gold posted an annualized real return of 3.6%, while the S&P GSCI rose by 2.1%. REITs were the worst performer, declining by an annualized 2.1% in real terms.
In the final period, between March 1997 and May 2009, gold was the best performer, rising by an annualized 5.9% in real terms compared with a 0.2% decline in the S&P GSCI, a 3.8% decline in REITs and a 3.7% increase in TIPS.
TIPS had the lowest volatility of 6.2% from March 1997 to April 1997. However, gold consistently delivered a lower average volatility throughout the three periods relative to the S&P GSCI and REITs. In the periods from 1993 and 1997 to date, gold's volatility was significantly lower, about 30%.
In high inflation years - defined by the study as an annual rise in the U.S. CPI of more than 5.0% -- although volatility picked up, the ratio of return to risk increased from an average of 0.10 in periods of low and medium inflation, to 0.33.
"In other words, gold not only performed best in terms of real returns during high inflation years, it also delivered a better risk/return profile," the study said.
The study cautioned that it is unlikely these assets will deliver similar real returns in the next few years because of the comparatively higher impact the last year has had on market returns and volatility.
To build a forecast model, the study compared the basic portfolio, plus gold and commodities from 1990 to mid-2008 with that of 1974 to 2009.
Gold, according to the study, was the asset more likely to help investors achieve the maximum reward-risk portfolio, based on a 6.9% allocation to gold. TIPS came a close second and the S&P GSCI a bit behind.
-By Matt Whittaker, Dow Jones Newswires; 212-416-2139; matt.whittaker@dowjones.com
