Gold, Gold Miners, and Inflation

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the biggest arguments for investing in Gold via the SPDR Gold Trust (NYSEMKT: GLD) is the inflation protection qualities that the yellow metal has. On the other hand, one of the biggest arguments for not investing in the yellow metal is the lack of income that the investment produces.

However, one of the qualities that is expected of stocks is that they usually rise faster than the rate of inflation, as EPS grow in line with inflation.

So, this got me thinking, is it possible that Gold mining companies actually produced income whilst at the same time growing in line with the rate of inflation as their earnings grew in line with gold?

To being with; does Gold actually grow faster than the rate of inflation in the US?

Gold vs. Inflation

<table> <tbody> <tr> <td> <p>Year</p> </td> <td> <p>Average Gold Price</p> </td> <td> <p>Gain</p> </td> <td> <p>US Inflation Rate</p> </td> </tr> <tr> <td> <p>2012</p> </td> <td> <p>$1,680</p> </td> <td> <p>6.9%</p> </td> <td> <p>2.35%</p> </td> </tr> <tr> <td> <p>2011</p> </td> <td> <p>$1,571</p> </td> <td> <p>28.3%</p> </td> <td> <p>1.63%</p> </td> </tr> <tr> <td> <p>2010</p> </td> <td> <p>$1,224</p> </td> <td> <p>25.9%</p> </td> <td> <p>2.63%</p> </td> </tr> <tr> <td> <p>2009</p> </td> <td> <p>$972</p> </td> <td> <p>11.6%</p> </td> <td> <p>0.03%</p> </td> </tr> <tr> <td> <p>2008</p> </td> <td> <p>$871</p> </td> <td> <p>25.3%</p> </td> <td> <p>4.28%</p> </td> </tr> <tr> <td> <p>2007</p> </td> <td> <p>$695</p> </td> <td> <p>15.3%</p> </td> <td> <p>2.08%</p> </td> </tr> <tr> <td> <p>2006</p> </td> <td> <p>$603</p> </td> <td> <p>35.8%</p> </td> <td> <p>3.99%</p> </td> </tr> <tr> <td> <p>2005</p> </td> <td> <p>$444</p> </td> <td> <p>8.6%</p> </td> <td> <p>2.97%</p> </td> </tr> <tr> <td> <p>2004</p> </td> <td> <p>$409</p> </td> <td> <p>12.7%</p> </td> <td> <p>1.93%</p> </td> </tr> <tr> <td> <p>2003</p> </td> <td> <p>$363</p> </td> <td> <p>17.1%</p> </td> <td> <p>2.60%</p> </td> </tr> <tr> <td> <p>2002</p> </td> <td> <p>$310</p> </td> <td> <p>14.4%</p> </td> <td> <p>1.14%</p> </td> </tr> </tbody> </table>


<img src="/media/images/user_14485/inflation-vs-gold_large.png" />

 The price of Gold has risen faster than the US inflation rate over the past 10 years. Although this has not always been the case as in the late 90’s and early 2000’s the price of Gold was basically stagnant. In addition, over the past 100 years the price of Gold has seriously underperformed the rate of inflation – for example between 1912 and 1976 the price of Gold went from $19 oz. to $35 oz. a compound growth rate of 1.3% when the average inflation rate was 3%.

Gold miners and inflation

So gold has recently been an inflation out-performer but how have gold mining companies faired over the past ten years?

<table> <tbody> <tr> <td colspan="2"> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p><strong>Newmont</strong> <span class="ticker" data-id="204643">(NYSE: <a href="">NEM</a>)</span></p> </td> <td> <p><strong>Barrick</strong> <span class="ticker" data-id="206868">(NYSE: <a href="">ABX</a>)</span></p> </td> <td> <p><strong>Goldcorp</strong> <span class="ticker" data-id="203707">(NYSE: <a href="">GG</a>)</span></p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Year</p> </td> <td> <p>% Change</p> </td> <td> <p>% Change</p> </td> <td> <p>% Change</p> </td> <td> <p>US Inflation Rate</p> </td> </tr> <tr> <td> <p>2012</p> </td> <td> <p>-13.53%</p> </td> <td> <p>-18.37%</p> </td> <td> <p>-14.81%</p> </td> <td> <p>2.35%</p> </td> </tr> <tr> <td> <p>2011</p> </td> <td> <p>5.19%</p> </td> <td> <p>11.34%</p> </td> <td> <p>17.88%</p> </td> <td> <p>1.63%</p> </td> </tr> <tr> <td> <p>2010</p> </td> <td> <p>30.10%</p> </td> <td> <p>24.83%</p> </td> <td> <p>18.37%</p> </td> <td> <p>2.63%</p> </td> </tr> <tr> <td> <p>2009</p> </td> <td> <p>-1.45%</p> </td> <td> <p>-10.61%</p> </td> <td> <p>-0.63%</p> </td> <td> <p>0.03%</p> </td> </tr> <tr> <td> <p>2008</p> </td> <td> <p>-0.88%</p> </td> <td> <p>16.55%</p> </td> <td> <p>23.47%</p> </td> <td> <p>4.28%</p> </td> </tr> <tr> <td> <p>2007</p> </td> <td> <p>-13.19%</p> </td> <td> <p>3.56%</p> </td> <td> <p>-14.49%</p> </td> <td> <p>2.08%</p> </td> </tr> <tr> <td> <p>2006</p> </td> <td> <p>20.24%</p> </td> <td> <p>30.68%</p> </td> <td> <p>118.49%</p> </td> <td> <p>3.99%</p> </td> </tr> <tr> <td> <p>2005</p> </td> <td> <p>-1.50%</p> </td> <td> <p>17.84%</p> </td> <td> <p>11.18%</p> </td> <td> <p>2.97%</p> </td> </tr> <tr> <td> <p>2004</p> </td> <td> <p>21.27%</p> </td> <td> <p>16.39%</p> </td> <td> <p>20.04%</p> </td> <td> <p>1.93%</p> </td> </tr> <tr> <td> <p>2003</p> </td> <td> <p>34.45%</p> </td> <td> <p>6.04%</p> </td> <td> <p>28.48%</p> </td> <td> <p>2.60%</p> </td> </tr> <tr> <td> <p>2002</p> </td> <td> <p>39.15%</p> </td> <td> <p>7.64%</p> </td> <td> <p>255.03%</p> </td> <td> <p>1.14%</p> </td> </tr> </tbody> </table>

 Obviously the share price gains seen in mining stocks have not been very consistent; however, as i highlight in the chart at the bottom of the page overall they have outperformed the US inflation rate. Also, interestingly, the price of mining stocks has almost no correlation the to movements in the price of gold over the past 10-year period. Barricks correlation is the highest at 0.7 and Goldcorp's share price has almost a negative correlation to the price of gold!

<table> <tbody> <tr> <td>Company </td> <td>Goldcorp</td> <td>Newmont</td> <td>Barrick</td> </tr> <tr> <td>Price correlation</td> <td>0.2</td> <td>0.3</td> <td>0.7</td> </tr> </tbody> </table>

What about dividend yields?

As I have already mentioned, one of the benefits of holding stocks over gold is the entitlement to dividend payments. Although share prices of the miners have underperformed gold over the past ten years, has dividend income from the companies been enough to out-pace the rate of inflation for the average investor?

<table> <tbody> <tr> <td colspan="5"> <p>Average dividend yield</p> </td> </tr> <tr> <td> <p>Year</p> </td> <td> <p>Newmont</p> </td> <td> <p>ABX</p> </td> <td> <p>Goldcorp.</p> </td> <td> <p>US Inflation Rate</p> </td> </tr> <tr> <td> <p>2012</p> </td> <td> <p>2.73%</p> </td> <td> <p>1.87%</p> </td> <td> <p>1.45%</p> </td> <td> <p>2.35%</p> </td> </tr> <tr> <td> <p>2011</p> </td> <td> <p>1.69%</p> </td> <td> <p>1.04%</p> </td> <td> <p>0.78%</p> </td> <td> <p>1.63%</p> </td> </tr> <tr> <td> <p>2010</p> </td> <td> <p>0.89%</p> </td> <td> <p>1.00%</p> </td> <td> <p>0.63%</p> </td> <td> <p>2.63%</p> </td> </tr> <tr> <td> <p>2009</p> </td> <td> <p>0.92%</p> </td> <td> <p>1.13%</p> </td> <td> <p>0.69%</p> </td> <td> <p>0.03%</p> </td> </tr> <tr> <td> <p>2008</p> </td> <td> <p>0.91%</p> </td> <td> <p>1.01%</p> </td> <td> <p>0.68%</p> </td> <td> <p>4.28%</p> </td> </tr> <tr> <td> <p>2007</p> </td> <td> <p>0.90%</p> </td> <td> <p>0.89%</p> </td> <td> <p>0.84%</p> </td> <td> <p>2.08%</p> </td> </tr> <tr> <td> <p>2006</p> </td> <td> <p>0.78%</p> </td> <td> <p>0.67%</p> </td> <td> <p>0.72%</p> </td> <td> <p>3.99%</p> </td> </tr> <tr> <td> <p>2005</p> </td> <td> <p>0.94%</p> </td> <td> <p>0.88%</p> </td> <td> <p>1.58%</p> </td> <td> <p>2.97%</p> </td> </tr> <tr> <td> <p>2004</p> </td> <td> <p>0.72%</p> </td> <td> <p>1.04%</p> </td> <td> <p>2.48%</p> </td> <td> <p>1.93%</p> </td> </tr> <tr> <td> <p>2003</p> </td> <td> <p>0.48%</p> </td> <td> <p>1.20%</p> </td> <td> <p>1.67%</p> </td> <td> <p>2.60%</p> </td> </tr> <tr> <td> <p>2002</p> </td> <td> <p>3.40%</p> </td> <td> <p>1.28%</p> </td> <td> <p>1.24%</p> </td> <td> <p>1.14%</p> </td> </tr> </tbody> </table>

The clear answer to that question is no. Although there have been several years (2002,2009) in the past ten that have seen the cumulative payout from these three gold miners top the rate of inflation, 80% of the time the dividends have been below the inflation rate.

So, how does it look overall?

All these figures show different pictures, however, the overwhelming bias seems to suggest gold is the best investment - even though investors receive no income.

But what about the big picture? What would an investment look like if $100 was invested in each asset in 2002 which asset would have performed the best as a compounded investment.  For this we can assume $100 was invested in each asset – Gold, Newmont Mining, Barrick Gold, Goldcorp and to represent inflation a TIPS or other inflation tracking investment.


<img src="/media/images/user_14485/indexgoldinflation_large.png" />

Starting at 100 in 2002 Goldcorp immediately became the winner with the stock rocketing up over 200% in that year alone. However, all the assets have outperformed inflation and surprisingly gold was only the third best investment until 2007! Dividend income from mining stocks has only marginally improved their returns over the past year. Although I have not removed management or storage costs from the price movements of gold over the time period I do not believe these costs would significantly reduce the returns.

Overall over the last ten years the best investment to have to avoid the daemon of inflation has been Goldcorp. Although this would have been a highly speculative pick ten years ago; therefore the best pick with the least risk would have been gold itself.

So over a long time frame gold miners can outperform inflation through a combination of dividends and capital growth. However the most stable and secure investment would have to be gold.


RupertHargreav has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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