Gold or Growth Stocks? The Inflation Hedge Dichotomy That's Splitting Investor Opinions

Gold has long been revered as an asset that’s at its strongest when global economies enter a difficult period, but is this really still the case? In the 21st Century, investors have seen a range of strong sustained rallies throughout many growth stocks that are faster to rebound from market crashes. So where’s the best place to invest? 

Although gold and leading growth stocks like FAANG favorites Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOG), Meta (NASDAQ: FB), and Netflix (NASDAQ: NFLX) have suffered from underperformance in late 2021 as inflation began to accelerate, both options have shown that they can perform well based on their respective form in 2022. 

Investors must contend with a rare cocktail of mitigating factors that has seen markets impacted by the Covid-19 pandemic and conflict in Eastern Europe - all of which has sparked higher levels of inflation in a way that has been difficult to anticipate due to its unprecedented nature. 

As domestic currencies battle against devaluation, investors have been unified in searching for alternative places to protect their wealth. But is gold still the quintessential safe haven commodity? Or have lessons from the 2008 Wall Street crash shown that investors can see better returns by banking on a stock market recovery? 

Is Gold Still the Safe Haven Asset it Once Was? 

As inflation began to rise in 2021, discourse began to turn to the credentials of gold as an effective inflation hedge in modern times. 

Whilst it’s often assumed that gold’s most effective utility is as a safeguard against inflation throughout domestic markets, the precious metal’s price history may indicate otherwise. 

(Image: Wealth Management)

As the data above shows, gold not only failed to keep up with inflation expectations throughout 2021, but the metal also severely underperformed against other investment options like oil, other commodities, and real estate. 

(Image: CNBC)

As CNBC data shows, gold’s underperformance throughout 2021 isn’t an isolated case. Following an excellent rally throughout high inflation during the 1970s, the asset fell short of its benchmarks throughout the downturns of the 1980s and 1990s. 

Such data suggests that the perception of gold as the world’s finest hedge against inflation may, in fact, be a rose tinted one. However, recent events surrounding Russia have paved the way for something of a gold revival in recent weeks. 

(Image: Gold.co.uk)

As gold’s performance over the past six months has shown, its value rallied at an extraordinary pace in February 2022 as news of the Russian invasion of Ukraine saw investors shifting their money into the asset in the anticipation that sanctions against Russia would spark a difficult period for many economies. 

“Increased geopolitical tensions and high inflation in the US and globally will contribute to an increase in gold prices,” said Maxim Manturov, head of investment advice at Freedom Finance Europe. “There is a risk that large gold mining companies Polyus (PLZL) and Polymetal (POLY), will exit the market.”

“Geopolitical developments in Eastern Europe will lead to the collapse of the foundations of the US dollar and the US financial system,” Manturov added, in the expectation that a major economic downturn will invariably see many investors turn to gold to protect their wealth. 

Could Growth Stocks Repeat their 2008 Rallies? 

One investment option that’s proved emphatically that it can recover well from a financial downturn in the 21st Century are leading growth stocks. 

(Image: Seeking Alpha)

As the chart above shows, stocks like that of Apple, which suffered heavy losses in late 2008 in the wake of the stock market crash prior, went on to record a parabolic price rally throughout the early 2010s, with other growth stocks like Amazon and Alphabet also posting nine-year returns of around 1,000% despite the crisis. 

(Image: Nasdaq)

Despite consistent outperformance throughout the 21st Century, we can see that many FAANG favorites struggled to keep up momentum with the S&P 500 in 2021, with stocks that traditionally perform best during inflationary periods like Amazon and Netflix experiencing the heaviest underperformance. 

Despite this, investors may be able to treat these underperforming stocks as a solid entry point for future growth. 

As inflation creates deeper cost of living squeezes, it’s likely that Amazon’s budget business model will become depended upon by countless customers, whilst stay-at-home on-demand entertainment from Netflix may experience a greater volume of active users over the coming months - which may lead to a stock price recovery that investors will benefit from. 

Today, gold has experienced the strongest response to the geopolitical events of recent weeks as investors look to shift their portfolios away from domestic markets. However, the historical performance of growth stocks means that there may be a great buy-in price on the way for investors who are aiming to capitalize on the long-term growth potential of the world’s favorite tech firms. 

As always, timing the right buy in is largely down to the research and analysis of the investor. If timed well, proven FAANG favorites may offer long-term inflation busting returns akin to the early 2010s.