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Inflation: The Fed, Unemployment, and Gold

Donald Calcagni, MBA, MST, CFP®, AIF®

Chief Investment Officer


  • A $2 trillion stimulus package just passed Congress today, providing relief for the economy and businesses . The total bill, including the stimulus package and expanding the Fed’s balance sheet, may go as high as $6 trillion.
  • Based on the last global financial crisis, stimulus spend does not automatically result in inflation.
  • As for gold, history and data suggests this may not be the panacea for hedging against inflation.
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Main Article

The Coronavirus Crisis

As I write this, the number of COVID-19 cases globally has surpassed 500,000 and weekly U.S. jobless claims hit 3.3 million, setting a record. By any measure, the U.S. economy appears to be in recession as Americans shelter in place to thwart the virus’ spread. To combat the crisis, the federal government is on the cusp of passing the largest fiscal stimulus package in U.S. history. Preliminary estimates put the total price tag for the package in the neighborhood of $6 trillion dollars. That’s twelve zeros.


QE: To Infinity and Beyond

Given our government runs a deficit each year, there’s no rainy-day fund. Subsequently, about $2 trillion will come through borrowing from investors like you and me. The remaining $4 trillion will come from “expanding the Fed’s balance sheet,” which means they’ll print it. It’s euphemistically referred to as “QE”, short for Quantitative Easing. The Fed will use these printed dollars to buy various types of bonds and related instruments, which is a means of pumping capital into the financial system


What about Inflation?

It’s an axiom among more conservative economic theorists, especially those like me who’ve been trained at the Chicago School of Economics, that the printing of currency should automatically lead to inflation. A key tenet of the faith is that printing money results in inflation. This seems logical enough. If no economic value is created to back the value of new dollars, then it follows that those new dollars should be purely inflationary.

But drawing simple cause and effect conclusions about the innerworkings of the world’s most complex economy is not so easy. Consider the 2008 global financial crisis. The Federal Reserve expanded its balance sheet by nearly $4 trillion between 2008 and 2017 to combat the crisis. Never in human history was there a more perfect economic experiment where the printing of so much currency should have sparked runaway inflation—at least according to our economic models and equations.

But it didn’t. In fact, inflation declined slightly in the aftermath of the crisis. From 1990-2007, U.S. inflation averaged 2.8% annually. Yet from 2008-2019, it fell to an annual rate of just 1.7%, despite nearly $4 trillion in QE and record low interest rates. From 2009-2014, when the Fed was most aggressively expanding its balance sheet, inflation averaged an anemic 1.2% annually. In fact, during this time the Fed was more concerned about deflation than inflation. Subsequently, it’s not entirely clear that an expansion of the Fed’s balance sheet will automatically lead to more inflation.


What about Gold?

On a related matter, I’m often asked whether investors should own gold as a hedge against inflation. The argument is that gold is a reliable store of value and a good hedge against inflation. But, to the contrary, the data clearly shows that, at best, gold is a questionable hedge against inflation over the long-term.

Let’s again consider the global financial crisis. If ever there was a case to be made for owning gold, it was in 2008. Let’s assume you timed it perfectly and decided to add gold to your portfolio in early 2008, just as the crisis began to unfold and before the Fed began to dramatically expand its balance sheet. For the 10-year period from 2008-2017, gold returned 4.6% annually while inflation averaged only 1.6%. Subsequently, if the definition of a “good” inflation hedge is solely that it outperforms inflation over 10-year periods, then gold arguably did its job over that time horizon.

But by that definition, so did stocks and bonds. U.S. bonds returned 4.5% over that period, and with significantly less volatility than gold. And if you were late to the game and added gold at the end of 2012 (but before the most aggressive QE), your returns were considerably worse for the remainder of our crisis period: gold returned -4.85% annually from 2013-2017. Data mining? Perhaps, but that doesn’t change the fact that gold was far from a stable store of value when it was needed most.

Risk & Return, 2008-20171
Gold Bonds Stocks
Return 4.58% 4.51% 8.50%
Risk 15.07% 3.30% 16.35%


And over longer horizons, it’s not entirely clear that gold has even kept up with inflation. In fact, since 1980, gold has returned a 2.65% annually while inflation averaged 3.12%.


Risk & Return, 1980-20192
Inflation Gold
Returns 3.12% 2.65%
Risk 1.49% 14.99%



Simple Cause and Effect – Not So Easy with the Economy

There are three takeaways from this analysis:

  • We should be careful drawing simple cause and effect relationships about the economy. The economy is highly complex. We should not necessarily expect an expansion of the Fed’s balance sheet, or a dramatic increase in U.S. government borrowing, to automatically lead to runaway inflation.
  • Even if we were to expect significant inflation going forward, it’s not entirely clear that gold is the best way to protect the purchasing power of your portfolio. While gold outperformed inflation in the immediate aftermath of the financial crisis, it was far from a stable source of value.
  • Finally, over longer periods, gold has demonstrated that it is a highly volatile asset that has failed to outperform inflation.


1 Source: FactSet, Inc.

2 Source: FactSet, Inc.

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