S&P/ASX 200 Index (ASX: XJO) gold shares should be shining brightly in 2022 amid soaring inflation.
At least, according to conventional wisdom, which would have us believe that gold – and by extension ASX 200 gold shares – offer investors a hedge against inflation.
Well, the inflation part of the equation is certainly here.
In the United States, inflation is running at a hot 8.5%. In the European Union, consumer prices are rising even faster. Inflation in the EU hit 9.1% in August and is expected to reach 10% once the September data is in.
Here in Australia, inflation has also reared its ugly head. The last quarterly figures showed a CPI increase of 6.1%. But that's likely to go higher.
According to RBA governor Philip Lowe, "The bank's central forecast is for CPI inflation to be around 7.75% over 2022, a little above 4% over 2023 and around 3% over 2024."
So, let's see how these three leading ASX 200 gold shares have fared since the opening bell on 4 January.
How have these ASX 200 gold shares performed amid soaring inflation?
Using the ASX 200 as our yardstick, the benchmark index is down 10.3% year-to-date.
By comparison, the Evolution Mining Ltd (ASX: EVN) share price is down 48.1%; the Northern Star Resources Ltd (ASX: NST) share price has dropped 11.2%; and shares in Newcrest Mining Ltd (ASX: NCM) are down 27%.
Taking a broader view, the S&P/ASX All Ordinaries Gold Index (ASX: XGD) – which contains some smaller gold shares outside of the ASX 200 – is down 24.1% this calendar year.
This comes as the price for the yellow metal itself has fallen 6% since 1 January.
Hmm. So, what's going on?
Busting the gold inflation hedge myth
Investment director at Fidelity International Tom Stevenson addressed what he called the myth that gold, and therefore ASX 200 gold shares, can act as a reliable hedge against inflation (courtesy of Livewire).
Stevenson said recent events have "skewered" this myth, adding:
This illusion gained traction in the 1970s when the precious metal performed well alongside sharply rising prices. But there is more correlation than causality at work here. The truth is that gold performs well when inflation is higher than interest rates and bond yields. Then, the metal is forgiven its most glaring disadvantage, the fact that it does not pay an income.
According to Stevenson, gold hasn't benefited because:
Negative inflation-adjusted or real yields are the key to a rising gold price. These are often associated with periods of high inflation but not always. Today's rapid swing from negative to positive real yields and the associated underperformance of gold this year make the point.
With interest rates across much of the world rising fast, investors look to be turning away from ASX 200 gold shares to other haven assets. Like the fast-rising US dollar.
