The graph below reveals gold's ability to hedge money-supply inflation. Going back to 1998, you can see that the price of gold has increased in near-lockstep with the growth in the world's money supply.
Gold is a good inflation hedge because its price appreciates with money-supply growth. But gold has one major shortcoming, it doesn't generate cash flow, and that's a weakness because it limits gold's ability to generate wealth. Gold, properly speaking, is an asset, not an investment
Given gold's inherent shortcoming, I believe there is a better asset to hedge inflation. The asset maintains purchasing power while building wealth.
A solid dividend-growth stock is the better inflation hedge, and the better wealth-producing asset. I'll demonstrate by way of example, though data-mined as I'll freely admit it might be.
An investor can chose from a multitude of quality dividend-growth stocks, but I’ve chosen ExxonMobil (NYSE: XOM) because investors understand its business and because of its longevity.
When investors think of inflation hedges (consumer-price or monetary), gold, silver, hard commodities, and real estate spring to mind. Rarely does a dividend-growth stock. Yet a dividend-growth stock just might be the best inflation hedge.
Returning to ExxonMobil. In 1971, the energy giant (then not ExxonMobil, or even Exxon, but Standard Oil of New Jersey) paid a $0.118 per-share dividend based on a split-adjusted average price of $2.30, which produced a 5.1% yield. Today, ExxonMobil pays $2.76 per share in annual dividends, which yields roughly 2.9%. ExxonMobil’s annual dividend has increased an average 7.4% over the past 44 years.
ExxonMobil’s dividend growth isn’t spectacular, but it’s good. Sometimes good is good enough. An investor who bought and held ExxonMobil shares for the past four decades receives more in dividends today than the initial cost of his investment in 1971. In other words, each year the investor realizes a 120% return on his $2.30-per-share investment on dividends alone. Then. of course, there's the cumulative dividend income received over the years.
As predictably as night follows day, share price follows income when income rises. Investors rationally bid up the share price to capture a rising income stream. ExxonMobil again proves my point. Its shares exchange hands at around $97 today, and have appreciated at a roughly 9% average annually since 1971.
Now, I chose 1971 as my anchor year for a reason. In 1971, the United States officially abandoned the gold standard – the Federal Reserve was free to print money (or at least it abandoned the charade that it previously wasn't able to freely print). That year, you could have bought an ounce of gold for $40. Through 2014, gold has appreciated at an 8.2% average annual rate. Gold has beaten consumer-price and monetary inflation, to be sure, but not as well as a share of ExxonMobil stock.
One protest assured to arise is that gold is no one's liability. The shortcoming in that argument is that it comes perilously close to imbuing gold with an intrinsic value. As all good Austrians know, all value is subjective, including gold's value. For the vast majority of us, gold's subjective value is based on its exchange value.
Though we can debate whether gold is an actual commodity, I'll slot it into that category nonetheless to embellish a point.
All commodities outside of food and fuel have very little use value to consumers. A commodity's value is primarily determined by someone else manipulating it to raise its subjective value to consumers and higher-level producers. Copper, silver, palladium, even timber hold no use value to me. Without an ExxonMobil, oil would hold no value. Without ExxonMobil, U.S. Steel, Intel, or any number of companies that turn raw commodities into higher-level production or consumer goods,most commodities hold no subjective value. .
Many investors view commodities as haven investments. They view them as inflation hedges and stores of value, particularly in times of extreme economic turmoil. I disagree; I don't view them as havens in the least. If society were to so devolve that it became devoid of ExxonMobil and all other commodity-elevating companies, most commodities would end up worthless. They would serve as neither inflation hedges nor stores of value.
The Federal Reserve (and every other central bank) can inflate till its heart's content, but a commodity's value will not outrun the value off the companies that elevate that commodity to either a consumer or higher-production goods.