Buy Gold When Inflation Is Low

If you think gold is a good investment only in periods of soaring prices, think again. According to Marc M. Groz of Quaternion Group Inc., a financial consultant that uses mathematical models of markets, gold is also a sound investment in a low-inflation environment.

Groz bases his view on a study that analyzed the performance of gold in periods of high (more than 6%), medium (3.5% to 6%), and low (less than 3.5%) inflation over the past 25 years. Perhaps predictably, he found that gold provided an average return of 22% in years of high inflation but also exhibited high volatility, plunging as much as 20% in some years. In years of medium inflation, on the other hand, its average return was actually slightly negative.

The big surprise was gold's performance in years with inflation below 3.5%. It not only posted a respectable average return of 11.1% but did so with much less volatility and downside risk. The moral of the story, says Groz: "Gold can not only act as an inflation hedge in periods of high inflation but also can provide high real rates of return with relatively low risk when inflation is low."