No Midas Touch: Gold Myths and Misconceptions

Gold is on a record run, outpacing almost every other major asset class since the pandemic, including a surging S&P 500. And at first glance, this may seem quite logical. After all, headlines are filled with news of escalating trade wars, armed conflict, elevated inflation, an ever-growing national debt, and heightened geopolitical instability. In short, it appears to be the perfect backdrop against which to seek refuge in gold. After all, according to the standard line, there is no better way to hedge what ails the world while simultaneously maintaining the purchasing power of your dollars. However, the case for gold is not as simple as you may have been led to believe, and explanations for gold’s performance (both current and historically) require a deeper examination before you decide to include it in your portfolio.

Misconception #1: Gold is an ideal way to hedge inflation over time and preserve the purchasing power of your dollar. 

Reality: While gold can sometimes perform well during periods of spiking inflation, it simply does not hold up on a consistent basis.

Let us begin our analysis with the relationship between gold and inflation, since this is the source of the most persistent argument in gold’s favor. However, as we will show, gold’s inflation fighting power only holds up slightly on an empirical basis, and more importantly, it depends heavily on the type of inflation in question.

Inflation is, for better or worse, a part of our economic reality. Our central bank, the Federal Reserve (Fed), has a 2% inflation target, meaning one of its primary goals is to ensure - yes, ensure - that we see a general rise in prices of around 2% each year. But policy makers cannot always predict or control all of the factors that influence prices. The oil embargoes of the 1970s, the massive disruptions associated with the COVID pandemic, and the surge in energy and food prices after the Russian invasion of Ukraine all provide ample evidence of how challenging it can be to land and stay precisely on a specific inflation target.

As such, for our purposes, the important thing to keep in mind is that there are two distinct types of inflation: targeted (or persistent) inflation and unexpected inflationary shocks. And as we will see, gold behaves quite differently depending on which type of inflation is prominent during a given period of time.

Gold versus Trend (Persistent) Inflation

The first type of inflation is that slow, steady increase in prices over time, and what comes to mind when you hear discussion of the Fed “inflating away” your purchasing power. It is structural, well-anchored, and typically where we expect the inflation rate to settle after short-term disruptions. This inflation matters for financial planning, since a primary goal of any plan is to maintain purchasing power over time, and this is the type of inflation that we can reasonably estimate on average over time given the Fed’s policies.

Given that inflation is ever-present, and since pro-gold arguments often revolve around preserving the value of your dollars, you might expect it to perform well even during low, stable inflation and over the long run. But the historical evidence does not support this narrative. When the inflation rate is stable, like we saw during the Great Moderation of the mid-1980s through 2007 and during the recovery after the Great Financial Crisis (GFC), gold performed quite poorly both on an absolute and relative basis, the latter of which we will address further below when we talk about why other asset classes may hedge this “expected inflation” even better.

Gold versus Inflationary Shocks

But this does not mean that gold cannot perform admirably during some inflationary periods. The most notorious, of course, being the dual spikes to double-digit inflation from the early 1970s until 1980. The U.S. had just abandoned the gold standard, President Ford lifted the ban on private gold investment, two major oil shocks (‘73 and ‘79) sent energy costs skyrocketing, wage controls ended, and the Fed was wholly focused on keeping unemployment low instead of fighting prices. This proved to be the perfect environment for gold to run, with an ounce of bullion surging from $177 at the beginning of 1975 to nearly $850 at its 1980 peak!

But even the inflation shock story is not consistent, as we see in the mostly sideways price action of gold during the pandemic-induced inflation surge in 2021 and 2022. Outside of the craziness of the 1970s, in fact, history has shown that surges in the price of gold are not particularly well correlated with periods of inflation (Figure 1). This may suggest that gold is not the go-to hedge against inflation, regardless of how heavily the mythology weighs on investors’ minds. To drive the point home, adjusted for inflation, gold only just passed its 1980 peak.ⁱ 

Misconception #2:  Gold is the best protection against the growing national debt, as attempts by the Federal Reserve to keep the government solvent would be highly inflationary and weaken the dollar.

Reality:  The national debt cannot be fixed through “monetization,” and even arguments of the Fed “inflating away” the debt over time do not make a case for gold.

But, say others, it is not the run-of-the-mill inflation or potential price shocks that you should be worried about – it is what comes next. Our national deficit is constant, the national debt is growing, and it is getting more and more expensive to service that debt every year. At some point, this theory goes, this amount of fiscal stress creates an environment in which U.S. Treasuries, heralded as the safe asset amongst safe assets, are no longer deemed as such, causing the government to no longer be able to borrow. The Fed would then need to step in as the “buyer of last resort” to gobble up the debt and keep the government afloat – a “monetization” of sorts. Or, to push down the debt, the Fed will simply buy it all from the public. Either way, inflation will then run rampant, and gold will be the ultimate refuge.

Clearly, the debt is no small problem (which we have discussed before), and we will not attempt to minimize the need to rectify it. But the argument that we are on the precipice of such a crisis, one in which demand for our currency and debt dries up, does not hold water for all the reasons we laid out in our defense of the dollar. As such, these scenarios are far from inevitable and are thus not likely to be a gold catalyst.

At its core, the fiscal argument is still one of inflation – whether through Fed response or a general weakening of the dollar due to lower demand for our debt. “Debt monetization” just means you are switching from borrowing money to cover expenses to a sort of inflation tax. The Fed would issue new currency to buy interest-bearing Treasury bonds, and there you go – lower debt at the small cost of a higher price level. But here is where theory runs into problems:

• There is currently about $2.35 trillion dollars' worth of currency in circulation.ⁱⁱ
• The total debt grew by over $2 trillion in 2024.
• The debt service alone for 2025 is likely to be near $1 trillion.

In other words, the Fed could double the currency level – and double the price level – to purchase outstanding Treasuries and essentially have zero impact on the debt. That seems highly improbable. Could the Fed simply go further, printing more and more? Of course, but hyperinflation not only seems a bit at odds with the Fed’s congressional mandate, but it would definitely not put us in a better fiscal position afterwards.

Other arguments about keeping rates artificially low to reduce the borrowing costs or keeping inflation higher to slowly eat away at the debt also find little support in practice. Remember, the Fed does not directly control bond interest ratesⁱⁱⁱ – the market does, meaning it’s technically not possible to do the former. And as for higher-for-longer inflation, well, we have already addressed why gold fails to deliver in such an environment.

Austerity and taxes – not Fed-driven monetization – remain the most likely solutions to the debt crisis. As such, at least in the U.S., a worsening fiscal backdrop alone does not make a strong case for gold.   

Misconception #3: Gold is a useful hedge for ongoing geopolitical and economic uncertainty.

Reality: While gold can do well when other assets are offering little, its safe-haven role is often short-lived and driven by factors that may not apply to most long-term investors.  

Gold may be considered a relatively safe asset, but it is not risk-free. The risk is not a loss of principle, but of opportunity. You see, gold has a few major shortcomings – it generates no cash flow, and while relatively liquid, it is not exactly how most of us want to pay for things. And these shortcomings, more than almost anything else, can help us truly understand how the price of gold changes. More importantly, they can help us better explain gold’s recent strength.

Gold’s opportunity cost – the price you pay to essentially forego other things you might be able to do with your money because it is already weighed down in gold – is not fixed. It depends heavily on what return you could get elsewhere. This is why we typically see real yields (yields adjusted for expected inflation) and gold prices move inversely (Figure 2) - if other assets are simply not offering much in return for your money, the fact that your gold yields nothing is less of a concern.  As such, we tend to see gold demand increase when other yields – say on cash and bonds – fall. This relationship is also tightly linked to the fact that gold is often considered a “safe haven” asset during times of severe economic weakness, as real yields tend to fall when the economy is performing poorly and the future is highly uncertain.

Gold’s Recent Performance: A Story of Poor Alternatives

In the sections above, we noted that the price of gold seemed to mostly ignore the inflation surge of 2021-2022, only exploding upwards after the Russian invasion of Ukraine. Clearly, that was a massive geopolitical shock, so an initial gold surge was expected, but the sustained performance seems to be linked more to the Western policy response than the conflict itself – specifically, the move to cut off Russia from international financial markets. As would be expected, this escalation caused other potential sanction targets to take action to insulate themselves. And to that end, we saw a sharp increase in gold purchases by Russia, China, Turkey, and a smattering of other nations who sought to maintain an efficient way to settle transactions.^iv 

Chinese citizens provide the other major demand story of the past few years, as they continue to scoop up gold in droves. This is for quite simple reasons – there are just not many better options for investors on the mainland. The Chinese economy remains in disarray, having never truly recovered from the pandemic, while the real estate market, which had been a primary source of investment and wealth storage, continues to suffer. Furthermore, interest rates in China are historically low, and there are fewer options to invest in foreign assets given the capital controls that the Chinese Communist Party (CCP) keeps in place.

But even when gold makes sense, as it does in these cases, it remains a story of relative value, not an argument for gold above all else. More importantly, much of the recent gold performance has been in response to massive shocks – first, the pandemic, and second, a war in Eastern Europe. Even though we don’t expect the geopolitical landscape to cool in the near-term, dramatic price moves require dramatic demand increases, not just sustained gold buying. And as you will see, gold is almost exclusively a story of dramatic, short-term price moves.

Misconception #4: Gold makes a great long-term addition to any portfolio given its ability to occasionally outperform and hedge risk.  

Reality: Timing matters more than anything for gold, and over time, the cost to hold it only grows.

Our readers have a wider range of investment options than the Chinese, and we venture to guess that they are also less concerned with cross-border transactions. This means that the decision to hold gold must come down to how well it serves your financial goals, and by extension, the role it plays in your portfolio.

We’ve spent considerable time on why gold is not effective as a long-term inflation hedge, but less time talking about the things that are, such as stocks. The key is that inflation is inherently hedged by bond yields and expected stock returns. This is because the yield that an investor demands to give up their money (i.e., invest instead of spending it) must already incorporate inflation expectations over the period in question – why otherwise would you part with it in the first place? This is why bond yields, like that on a 10-year Treasury, move up when inflation expectations rise, and why stocks, in response to rising yields, tend to fall (both as bonds become relatively more attractive and stock prices fall to in order to offer a comparable yield going forward). So, while gold’s ability to hedge inflation is more situational, that of stocks and bonds is built into their return expectations. So, it should come as no surprise that over the long run, stocks outperform gold.

To be fair, there have been many periods when gold has outperformed quite considerably. More interestingly, there are even periods during which, had you simply held gold over stocks -say, if you bought gold between the dot-com bubble and the pre-GFC stock peak - you would still be outperforming the S&P 500! But of course, we are taking some liberties with this time framing, specifically isolating periods right before disaster struck the markets – something a bit harder to forecast ahead of time.   

However, with gold, the timing is perhaps more important than anything else. The history of the gold market is one of dramatic moves followed by extended periods of tepid performance. In fact, over the past handful of decades, gold’s positive performance is due almost entirely to a small subset of price moves – just around 10% of that entire period.^v 

But this is, in fact, a selling point – gold hedges tail risk in markets, which just means it does well when the unexpected and terrible occurs. However, it also means that most metrics we care about when building portfolios – correlation between asset classes, expected returns, volatility – are not overly useful when it comes to analyzing gold. This means that while gold may sometimes look like a decent alternative for stocks or bonds on a chart, its movements are much less useful for planning.  And this dramatically shifts how we should perceive the role gold plays in a portfolio, as instead of it serving as a useful long-term diversifier, it really comes down to how much you are willing to give up in the way of returns during the 90% of the time when gold is not performing well. And when your alternatives are paying dividends and coupons, you could be giving up quite a bit.^vi

Gold for the Right Reasons

Gold has acquired near-mythical status over the decades. It seems as if, regardless of the macroeconomic environment or the current “issue,” gold is considered the correct way to weather the storm. Perhaps this is due to the considerable amount of advertising dollars that go into promoting gold (linked, of course, to the spreads and fees that brokerages charge), or perhaps it is simply because the things that gold is supposed to hedge are ever-present – high government debt, inflation, and geopolitical uncertainty. This makes it quite easy to always hint, perhaps with a wink and a nod, that the real trouble is on the horizon, so you should batten down the hatches now, and get some gold.

But gold is no panacea and it does not come cost-free.  As such, do not conflate gold’s recent performance with what it is supposed to do, according to its proponents.

• Do not hold it because you consider it a useful inflation hedge over time, because it has simply not proven to be one.
• Do not hold it because you fear a dramatic worsening of our fiscal situation or a global dismissal of our dollar, because this is not the likely outcome of our current situation.
• Do not hold it because you think the gold standard is coming back and it will be acquired en masse by global banks, because that is not the bull case some envision.
• And finally, do not hold it because you have no better options, because you likely do.

That said, gold can play a role in a well-rounded portfolio, but only when used for the right reasons, and only when its inclusion doesn’t negatively impact the pursuit of your financial goals. If you simply want to hedge what tail risk is ever-present in the world and are prepared to accept the costs of what could be a very long wait, a bit of gold may serve you well. Just don’t expect it to do magic. And don’t underestimate the value of your dividends. 

ⁱGold prices - 100 year historical chart. (n.d.). Macrotrends | The Long Term Perspective on Markets.
ⁱⁱLiabilities and capital: Other factors draining reserve balances: Currency in circulation: Week average. (2025, March 17). Federal Reserve Economic Data | FRED | St. Louis Fed.
ⁱⁱⁱThe myth of Federal Reserve control over interest rates. (2018, June 25). Econlib.
^ivCentral Bank gold, who holds and added the most since 2021. (n.d.). Buy Gold, Silver and Platinum Bullion Online | BullionVault.
^v10% of the time would explain all of gold's performance. (2023, October 10). Investing in Physical Gold | Buy Gold & Silver Bullion Online | GoldBroker.com.
^viThe power of dividends: Past, present, and future. (2023, March 24). Hartford Funds.

The information in this report was prepared by John Weitzer, CFA, Chief Investment Officer, Matt Wiley, CFA, Vice President of Investment Management, and Matt Conner, Senior Investment Consultant of First Command. Opinions represent First Command’s opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual advisor. All statistics quoted are as of the date of this publication, unless otherwise noted. First Command does not undertake to advise you of any change in its opinions or the information contained in this report. This report is not intended to be a client specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Should you require investment advice, please consult with your financial advisor. Risk is inherent in the market. Past performance does not guarantee future results. Your investment may be worth more or less than its original cost. Your investment returns will be affected by investment expenses, fees, taxes and other costs.

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