You are currently viewing Insights – Has gold lost its status as an inflation hedge?

Insights – Has gold lost its status as an inflation hedge?

Table of contents

  • Summary of inflation story of 12 select markets
  • Review of the gold price in different currencies and questioning the US centric price narrative
  • Does investment in gold by non-Americans entail an unwanted USD currency exposure?
  • The effects of adding 10% gold in a stock portfolio in 2022 in 12 markets in local currency
  • Analysis of risk parity allocation to stocks and gold and how such portfolios fared in 2022

The theme of the spring for this blog has turned out to be centered around gold, and that is no accident. With inflation having been rampant and in the spotlight since the end of the pandemic, it is hard to avoid talking about inflation hedges.

This article has been in the works for quite some time now, and I had originally planned for it to be published earlier in the year. Namely, we will today be looking at how gold performed in 2022 and if was really as bad of an investment as it has been credited. While 2022 is now almost half a year behind us, the lessons learned knows no expiration date, so I am not at all worried about this “late” posting.

As the text turned out quite long, I won’t be taking up any more of your time with further introductions. Let us therefore straight away jump into the subject matter of reviewing whether gold has lost its status as an inflation hedge and if its performance in 2022 really were so underwhelming as depicted in financial media.


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To refresh your memory, in 2022, the main story which has shaped the markets was the inflation shock. For the past decade, i.e. in the 2010s, we have gotten used to economic growth driving the narrative, but, for a change, the past 18 months inflation surprising on the upside has been the key contributor to changes in asset prices.

Paired with high and rising inflation comes underperformance of stocks and bonds, as inflation expectation is a key component in the valuation of these assets. As most conventional portfolios (like the 60/40 stock/bond portfolio) are heavily tilted toward these asset classes, the investors who suffered last year were numerous.

While it can be debated how much of a “surprise” rising inflation was on the back of Covid related economic stimulus and accommodative central bank policies, the rate of inflation was elevated and kept rising in many parts of the developed world.

Nevertheless, inflation was rising, but more so in some countries than in others. As this blog has the privilege of being read by investors from many countries (especially around Europe), we will today be attempting a broader view on inflation and returns (not all European countries can be catered for unfortunately, but we’ll make due with a selection based on from where most readers are accessing this blog).

Just as a reference, see the below chart depicting the monthly year-over-year headline inflation prints as reported for each month in 2022 below for select countries. In only a few cases, the inflation number peaked around the half-year mark (United States, Switzerland, and Spain), while in most other countries, the inflation saga continued well into 2023.

Summary of YoY Headline Inflation rates in select countries for each month in 2022. Data source: Trading Economics. My chart. (Click to enlarge)

When inflation surprises occur, investors seek to implement protection against it in their portfolios. Now, there are several ways of achieving this, and from an All Seasons Portfolio perspective, I am doing it by including an array of inflation-hedging asset classes in the form of inflation-linked bonds, commodities, and gold. I have previously written a post about how these protect a portfolio against different types of inflation, if you want to check out further reading material on this topic.

The latter of these three – gold – is the most commonly known inflation hedge. It is, for example, one of the cornerstones of Harry Browne’s Permanent Portfolio, which was created back in the early 80’s.

Earlier this year, I also wrote a piece for what gold brings to the table for a diversified portfolio. Today’s post is touching on the same subject, but using hard data from real markets in 2022.

So, during a year which has been as inflationary as 2022, guess if I have heard many disappointed comments when the USD price chart for gold has had the shape seen in the chart below? The price was barely break-even over the year, and having a -10% drawdown from the start of the year (and a -22% drop from the top in early March).

There seems to be a cause for cognitive dissonance here. We know that we are in an inflationary environment, as we saw in the summary chart further above, and we have been taught that gold is an inflation hedge. So why is reality not matching theory?

The main issue with this perception is that the voices we (investors) hear in financial media are terribly U.S. centric. Even for Europeans, it is hard to escape the reach of the world’s largest financial markets and its news platforms. Hence, what we have been told about gold in 2022 is that it has been underperforming when measuring the price in dollars. The USD gold price started 2022 at around $1,800/oz, and ended the year at nearly the exact same $1,800/oz mark, after it had seen lows of $1,650/oz in November 2022. When reading these kinds of results, how could anyone be exuberant?

The fact is though, that we live in a world made up of many countries with their own financial markets and with many of them having separate currencies that live their own lives. Each such currency has its own relationship with the value of gold. But before moving on to the next phase of our discussion and consider the gold price in different currencies, let us stay one more moment in the Dollar world.

If we look at the gold price (USD) relative to other safe-haven assets that usually work as ballast to equities in a portfolio context (namely bonds), gold performed much better than long-term nominal bonds and long-term TIPS in 2022, as depicted by the below chart.

2022 performance of gold (IAU) vs. Vanguard Long-Term Treasury Index Fund (VGLT) and PIMCO 15+ year TIPS (LTPZ). Chart inspired by Bob Elliott

The expectations were still that gold should have been a better investment in the inflationary 2022.

Referring to the article I recently (February 2023) posted on the case for gold, while 2022 offered several examples of the environments when gold thrives (elevated and rising inflation), it also came with several elements that work against the gold price (in USD) which offset the effects of rising inflation.

One key reason for the poor performance was the US Federal Reserve’s (relatively) quickly implemented actions against inflation through a rapid series of rate hikes. This appreciated the value of the dollar, leading to that both the nominator and the denominator in the USD/Gold equations rose in tandem (the dollar thanks to rising rates and gold thanks to rising inflation), with the net effect being offset. This partially why gold is sensitive to rising real rates. What we European investors thus need to remind ourselves of is that the gold price in dollars chart is not the whole truth when it comes to evaluating gold as an investment.

While American investors might have a reason to moan about gold being just a shiny pet rock that did not do is job in 2022 (at least in a record rate-hiking environment), investors in the rest of the developed world actually have no reason to be as grumpy.

Let us therefore take the same gold price chart from above and add a few lines to it next to the dark green dollar line.

Here below, you find the same asset – gold – for the same period – 2022 – but now measured in seven different currencies (whereof five are European).

Gold price in seven select currencies in 2022. (Click to enlarge)

Now suddenly, the story has changed its tune a bit compared to our initial reaction when only considering the price in dollars. We may have been mistaken to count out gold.

Instead of seeing a dreadful year for gold where the line barely makes it above zero return, it looks rather decent when we measure the price in other currencies (Euro, British Pound, and Czech Koruna), and even great for some (Japanese Yen and Swedish Krona with 15% gold price appreciations).

Looking at euros, for example, we note that the gold price started the year at around €1,600/oz (also the low-point for the year), rose to a high of €1,850/oz in early March, and ended the year at just above €1,700/oz, a positive return of more than 6%.


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For investors outside the United States, gold therefore actually seems to have merit as an inflation hedge. But what is it that has appreciated in value; gold, or the dollar, or both? And does investing in gold for non-Americans entail a currency risk and unwanted dollar exposure?

Does gold have currency risk?

This question is somewhat of a sidebar or an interlude in this post, but one I find worth addressing for a brief moment. One of the most common misconceptions I have encountered this year around gold is whether an investment in gold has an inherit currency risk against the US dollar. It is a variant of what it is that we are actually pricing: gold or a currency.

The currency risk question pops up after reviewing the first chart that shows the gold price in USD, whereby investors (mostly retail investors) wonder whether gold as an investment has had a bad year, and it is only rescued in local currency due to the USD being so strong. Phrasing the question another way: Has gold risen in EUR, only because the euro has lost so much value against the dollar, considering gold has barely made even when measured in euros?

You could rephrase the question by substituting “gold” with a stock, like Apple, for example. If Apple’s stock falls in a year (in dollars), but a European is up on his or her brokerage account, then has the Apple common stock actually increased or decreased in value? It depends on the unit of measure.

The background to this question comes also from that currencies have been quite volatile in 2022, especially when measured against the US dollar. Because the Fed has been the most aggressive central bank in the developed world when fighting inflation with rate hikes, the dollar has appreciated a lot against other currencies. Foreign investors can expect to earn more on their cash in dollars rather than their own currencies, why they sell their own (falling demand, increasing supply) and buy dollars (rising demand, falling supply), causing the FX dynamic.

While the below chart only illustrates the volatility of how the euro has fared against other currencies. By early October, for example, the euro had lost about 15% against the dollar (light gold line), even though it has caught up a bit after the Fed became less hawkish in its communication throughout the fall.

The price of Euro vs. other currencies. A rising line means that EUR has strengthened against the opposite currency of the pair.

It is true that gold and gold futures contracts are most commonly priced in USD. However, that does not mean that you have any USD exposure when you invest in gold from another country than the United States. The value of gold should always be measured in your own currency, and you should therefore be ignoring any other currency from the mix, regardless what currency this asset’s price happens to be popularly quoted in. This is especially true when you are seeking to protect your portfolio against inflation in the country you live in.

To aid the understanding of this, you can view this in terms of philosophical identity laws. By taking a step back, you can note that gold is a thing of its own with its own intrinsic value. That value can then be expressed in any measure you chose, for example euros, dollars, or kilograms of rice, etcetera.

Or put in another way, regardless if you measure the length of a marathon as 42.2 kilometers or 26.2 miles, you’re still going to be pretty damn tired at the end of it. The unit of measurement doesn’t change the distance. It is thus irrelevant how two sets of measuring tapes compare against each other (the currencies EUR and USD), when you, who price the gold in euros, talk with another person who measures the value of the same piece of gold in dollars.

So, it is only when quoting the price that there is a triangular relationship between gold, USD, and a third currency (e.g EUR), but the relationship between the two currencies has no impact on the value of gold. Therefore, European investors do not have an unwanted dollar exposure or currency risk when investing in gold.

For the same reason, it is highly superfluous for Europeans to invest in “EUR hedged” gold products, as you just add a layer of transaction costs.

Gold as an inflation hedge in a diversified portfolio

Jumping back to the broader question about gold as an inflation hedge in a portfolio, we will carry out a test to learn whether adding gold to a portfolio was a positive or negative experience in the inflationary year 2022.

We are testing this by comparing a simple 90/10 stocks/gold portfolio against a 100% stocks portfolio to see if the added gold exposure makes any difference during last year.

In doing so, we will be looking at 12 different stock markets as our benchmarks.

As the point of this post is to discuss gold as an investment for individual investors, I am pointing out that all numbers are in local currencies, for example in euros for i.a. Dutch investors, Swedish krona for Swedish investors, and so forth.

The analysis is also made on the basis of a home country bias, by comparing against the local stock index. Using the Dutch and Swedes again as examples, the ETFs used have exposure to the stock indexes AEX in the Netherlands and OMXS30 in Sweden. All indexes are shown as ETFs tracking the indexes, meaning that the lines are net of management fees.

A good starting point to this analysis is to review how each of the twelve stock markets fared in 2022. We can see from the below chart that the descriptive words that can be used range from “not that bad” for Spain, Japan, and United Kingdom, to “quite horrid” for the United States, Switzerland, and Czechia.

Stock indexes over 2022, made up of: DAX (DE); AEX (NL), FTSE MIB (IT), CAC40 (FR) MSCI Spain (ES), OMXS30 (SE), PX (CZ), Solactive Swiss Large Cap Index (CH), FTSE 100 (UK), S&P 500 (US), MSCI Japan (JP), STOXX Europe 600 (Europe). (Click to enlarge)

As you have found your way to this blog about the All Seasons Portfolio and diversified strategies, I will make the bold assumption that you may not be too excited about a portfolio that only includes stocks.

Rather, we want to add some diversification to the mix to make the drawdowns shallower and potentially improve our absolute returns in a bad year when stocks underperform.

What we will begin by doing next, is to take the same stock ETFs and add 10% allocation to gold. This 10% allocation has no real science behind it (much like the 60/40 portfolio’s arbitrary 60% allocation to stocks and 40% to bonds), but I will use this just for a) illustrative purposes and b) because the “typical” suggestion you fint when browsing the web is that 5-10% of a portfolio should be made up of gold. So, 10% it is.

Before we look at the results for all of the individual markets for such 90/10 portfolios, let’s only focus on our two main markets first: United States and Europe. I though it might be easier to start with looking at just two pairs of lines, instead of all 12 portfolio comparisons at the same time. (No overwhelming charts yet).

Here we use ETFs investing in the S&P 500 and Stoxx Europe 600 for our equities exposures (green lines), and compare against a portfolio with the same ETFs, but adding a pinch of gold. The latter portfolios are rebalanced to 90/10 at the end of each calendar month.

The portfolios containing gold are rebalanced monthly and depict gold prices in the same currency as the stock ETF (EUR and USD, respectively). Stock indexes tracked in local currency: S&P 500 (US), STOXX Europe 600 (Europe). Gold is represented by Xetra-Gold. (Click to enlarge)

In both cases, the pattern is clear. Both gold lines (representing the portfolios with 10% gold allocation) outperform their green line benchmarks (100% stocks allocation). While gold didn’t manage to completely rescue the portfolio to deliver positive returns (a tall order for just a 10% allocation), the end result was vastly improved, and the drawdowns during the course of the bad year were shallower.


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Next, we will expand our view from the US and broader Europe to all our 12 portfolios. But rather than showing a line chart (which would be rather messy with 12 portfolio pairs), let’s just look at a summary of end results (the general patterns over the year were similar to the two sets shown above).

To avoid any claims that the positive effect from gold is due to lucky rebalancing, the test has been run with three different rebalancing intervalls, namely annually, quarterly, and monthly.

Stock indexes for FY2022 (green color) compared against a portfolio with 90% stocks and 10% gold (gold color); both in local currency. The portfolios containing gold are shown with three different rebalancing patterns: annually (“A”), quarterly (“Q”), and monthly (“M”). Stock indexes are made up of: DAX (DE); AEX (NL), FTSE MIB (IT), CAC40 (FR) MSCI Spain (ES), OMXS30 (SE), PX (CZ), Solactive Swiss Large Cap Index (CH), FTSE 100 (UK), S&P 500 (US), MSCI Japan (JP), STOXX Europe 600 (Europe). For ease of reference, gold (Xetra-Gold) is shown to the right in EUR and USD. (Click to enlarge)

Only in one case (Swiss portfolio) did one rebalancing frequency (quarterly) fail to improve on the stock market return, but in that particular case, we highlight that Switzerland had benign inflation (around 2-3% in 2022) and a strong currency (EUR/CHF had similar return as EUR/USD).

In all other cases, we see that just by adding 10% gold to an equity portfolio, the returns in 2022 were improved in local currency.

Portfolio performance with gold based on risk parity allocation

Finally, as the topic of this blog is about risk parity investing, let us, just for fun (because this is fun, right?), also make the same comparison, but now including portfolios of stocks and gold with equal risk contribution.

For this exercise, I have for simplicity’s sake assumed the assets’ annualized volatilities of 15% for stocks and 19% for gold, which rhymes with their approximate long term standard deviations (in USD). That gives us an allocation split of 56% stocks and 44% gold for 50/50 risk allocation. We also include the 90/10 portfolios from the above segment as a benchmark. Both gold portfolios (90/10 and 56/44) used in the analysis have been rebalanced monthly.

Stock indexes for FY2022 (green color) compared against a portfolio with 90% stocks and 10% gold (light gold color), and risk parity allocation of 56% stocks and 44% gold (dark gold color); all in local currency. The portfolios containing gold are rebalanced monthly. Stock indexes are made up of: DAX (DE); AEX (NL), FTSE MIB (IT), CAC40 (FR) MSCI Spain (ES), OMXS30 (SE), PX (CZ), Solactive Swiss Large Cap Index (CH), FTSE 100 (UK), S&P 500 (US), MSCI Japan (JP), STOXX Europe 600 (Europe). For ease of reference, gold (Xetra-Gold) is shown to the right in EUR and USD. (Click to enlarge)

The end result is logical. If a 10% allocation to gold would improve returns, then a 44% allocation should improve it further.

This time around, we also see an effect from the rebalancing premium which is greater when the allocation to gold increases. Look for example at the Swiss bars, where the negligible effect from gold in a 90/10 portfolio has massively improve the results by almost halving the negative return. This pattern comes again across the board, with a couple of portfolios (Spain and Japan) even changing symbol from a “-” to a “+”.

Hence, when gold was allowed to live out its potential in a portfolio by giving it its fair share of risk allocation, it became a force to be reckoned with.


During 2022, inflation was the most prominent feature of the financial markets, and investors again looked to gold as a way to hedge their portfolios. However, as the gold price in US dollars struggled throughout the year, skepticism for the asset class grew among investors.

What many forget is, however, that you need to a) view the change in gold price in your local currency, and b) look at gold through the lens of portfolio construction. Namely, gold in other currencies than USD fared much better, with double-digit returns in several cases, which stands in contrast to the negative narrative painted by US centric financial media..

Moreover, when adding just a 10% allocation to gold in an all-equity portfolio, the deeper drawdown of the stock markets was somewhat alleviated, improving both risk-adjusted and absolute returns, regardless which markets view reviewed. Gold thus offered protection in such diversified portfolios.

When increasing the weight of the gold sleeve to equal volatility contribution (risk parity), the effects were even more noticeable, more than halving any drawdowns and in in some cases turning negative yearly returns into positive ones.

Furthermore, when a non-American invests in gold, your exposure is 100% to the price in gold in your local currency, regardless what currency the asset or tracker may be priced in. There is no USD currency risk inherit in such investments, meaning that currency hedged gold products are strictly unnecessary.

In conclusion, despite the negative sentiment around gold in 2022, it delivered more than commonly perceived, both as a protection against inflation and as an asset with low correlation with stocks. We find that gold retains its important role in any diversified portfolio, and see the value of the 7.5% allocation to the asset class in the All Seasons Portfolio, where it belongs in the inflation-hedge bucket together with broad commodities and inflation-linked bonds.

With these words, I thank you for your attention, and I hope you found this article about gold investments valuable. I appreciate you sharing your view on gold as a part of your diversified portfolio in the comments below, or, if you rather discuss bilaterally by email, by dropping me a line to

All the best,

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