Worried about inflation? Here’s What Investments Worked in the 1970s


IInflation continues to hover above an 8% annual rate, with prices for gasoline, natural gas, food and used vehicles rising the most. The last time inflation was this high, Ronald Reagan was only a year into his first term and the headline interest rate was around 13%, down from 1% today.

Forty years ago, the United States experienced one of the highest inflations in the country’s history after a decade of global oil shocks, accommodative monetary policy and expanding government borrowing. The convertibility of the dollar into gold had recently been suspended, which had the immediate effect of devaluing the greenback.

There are key differences between then and now – unemployment was alarmingly high in the 1970s and early 1980s, for example – but there are also some clear parallels. Today we face our own global supply chain disruptions, for everything from food to energy, largely due to the war in Eastern Europe and ongoing lockdowns. Covid. A shortage of semiconductor chips has slowed the manufacturing of new automobiles, home appliances, data centers and more.

Although the Federal Reserve has started raising rates in a new tightening cycle, monetary policy remains extremely accommodative on a historical basis. Combined with trillions of dollars in pandemic-related stimulus, that has served as fuel for corporate borrowing and household debt, both of which are at historic highs. For the first time ever, the federal government now owes more than $30 trillion, or nearly 130% of the US economy.

The truth is, officials are much more comfortable with large deficits today than they were in the 1970s, and it’s all thanks to Modern Monetary Theory, or MMT. MMT proponents believe that deficit spending is perfectly acceptable since the government can simply issue more of its own currency to pay for it all. And so the cycle continues.

Gold was the number one asset of the 1970s

So what can investors do?

Again, history is a valuable guide. The best asset to own in the 1970s was gold, which rose from $35 an ounce at the start of the decade to $850 in 1980. Investors were looking for a durable asset that could keep up with inflation and hold its value. value. over time, and the yellow metal did the trick. Unlike fiat currency, which policymakers can create more out of thin air, gold takes incredible amounts of time, energy, and money to produce. This allows you to control your supply.

But does the thesis still hold?

Well, consider this: so far this century, through the end of April 2022, gold has outperformed the S&P 500 by a factor of three. Not bad for a “barbaric relic” that generates no income.

Gold has beaten the market so far this century

Certainly, if we compare gold to the market over the past 10 years, the metal has significantly underperformed as stocks rallied in the longest bull market in history fueled by low interest rates. and low inflation.

That said, the S&P 500 has traded lower in 2022 due to inflation risk and fears the Fed will raise borrowing costs much faster than initially expected. Gold was therefore the best asset, delivering a positive return in the first four months of the year.

Does Bitcoin Steal Thunder From Gold?

Some market watchers may wonder why gold hasn’t climbed even higher. Indeed, when inflation topped 8% in March 2022, the price of the metal didn’t quite manage to break above its all-time high of $2,073 per ounce, set in August 2020.

There is speculation that the recent popularity of Bitcoin and other digital assets has siphoned off money from investors that otherwise would have gone into gold. As a bitcoin fan myself, I’m not so sure. With a total market capitalization of $11.5 trillion, gold remains one of the most liquid assets in the world and, unlike Bitcoin, it is universally respected and traded. Dozens of central banks around the world continue to hold billions of dollars worth of gold in their reserves.

I should also point out that Bitcoin has fallen dramatically from its November 2021 all-time high, putting it on a similar trajectory to tech stocks and other risky assets. This has caused some investors to question its perceived role as a store of value, or “digital gold.”

Commodities were also a profitable bet

Even if physical gold isn’t hitting new highs, its resilience in the face of runaway inflation tells us that what the market seems to favor right now are durable assets that have intrinsic value. It’s no wonder, then, that the prices of nearly every commodity – from metals to energy to agriculture – are going parabolic in many cases.

We saw the same thing happen in the 1970s. The S&P GSCI, which tracks a basket of commodities, rose sevenfold over the decade, while the S&P 500 remained virtually flat.

Inflation kept stocks grounded in the 1970s2 as commodities soared

With commodity prices doing so well right now, we think energy producers and metal miners look attractive by extension. Many oil and gas companies posted stunning results in the first quarter of 2022, which was reflected in rising stock prices. London-based Shell, for example, reported $9.1 billion in first-quarter profit, nearly three times what it made in the same quarter in 2021. In New York, shares of Shell increased by 23% since the beginning of the year until the end of April.

Inflation may not be as “transient” as the Fed initially argued, but at some point prices will stabilize. Until then, it is important that investors do not make rash decisions and panic sell at a loss. If nothing else, it may be prudent to simply hold your positions longer than expected. This isn’t the first wave of inflation we’ve seen, and it probably won’t be the last.

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Originally published by US Global Investors on May 23, 2022.
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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices of US companies. The S&P GSCI serves as a benchmark for investing in commodity markets and a measure of commodity performance over time. It is a tradable index that is readily available to market participants on the Chicago Mercantile Exchange.

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