Why Gold is a Winner in Times of Inflation


As an investment, gold won’t offer the same returns as stocks, but it may offer some relief from rising inflation, says Jim Cramer, host of “Mad Money” and Investing Club of CNBC.

“I believe in gold,” Cramer told CNBC Make It. He argues that it’s one of three things that “holds its value in a recession.” The other two: masterpieces and incredible mansions.

Gold’s value stems from its scarcity as a commodity, as well as its long history as a stable medium of exchange. The price of gold tends to rise during times of economic uncertainty and when inflation is high.

The current year-over-year inflation rate is 8.6%, which is well above that of the Federal Reserve. benchmark target rate of 2%. In an attempt to reduce inflation, the central bank raised interest rates, which made it more expensive to borrow money.

For this reason, many investors fear a possible recession. On Monday afternoon, the S&P 500 officially entered a bear market, and is currently down more than 20% year-to-date.

This is why gold can be a safe haven: the returns of gold relative to stocks tend to be inversely proportional, meaning that when stock prices fall, the price of gold tends to rise. increase.

For those who want to own gold, like Cramer, he offers three options.

The first is the VanEck Vectors Gold Miners ETF, known as GDX, a security that tracks the overall performance of gold mining companies. It’s one of the most liquid ways to own gold, which means it’s relatively easy to sell, compared to other options.

The second is through other gold-linked ETFs, including those known as senior or junior funds. Junior funds are more speculative, as they follow junior mining companies with growth potential. Senior funds are comparatively safer, as they include mature mining companies that generate consistent revenue from their mines. “I own a senior gold fund,” says Cramer.

Finally, you can own physical gold. However, it’s not a very liquid investment: “It’s not like you can easily sell a gold coin through a brokerage account,” Cramer said on “Mad Money” in 2019.

The other problem is that physical gold is easily stolen. For this reason, you would want to pay for additional storage and security, such as a safe. However, storage costs aside, physical gold can be a cheap way to own gold, Cramer tells Make It.

Cramer has always recommended owning some gold “as insurance against the unknown,” as he put it in 2019. In his personal portfolio, 5% is typically reserved for gold-related investments.

However, there is no guarantee that the value of gold will increase. And stocks and bonds are generally considered better retirement investments since they have historically outperformed the rising price of gold over the long term. But gold can be a safe investment when the economic outlook isn’t good, Cramer says.

As he said in “Mad Money” at the end of 2020, buy gold “if you want insurance against inflation or just general economic chaos.”

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