IC Market Espresso 21 Jul 2023

Is Gold Losing its Shine? Reevaluating Gold’s Effectiveness as an Inflation Hedge

Gold is widely regarded as the oldest, and safest inflation hedge, with its value dating back to as far as 3,000 BC. It’s been a store of value for thousands of years, with real-world uses primarily in jewelry, and recently within electronics as well. With tangible value and limited supply, it’s no surprise why it has held value for so long.

Although gold has an impenetrable track record, in recent times, the correlation between the value of gold and consumer prices hasn’t been as firm as one would expect. Today we’re going to be looking into gold’s legitimacy as a store of value in the modern world.

In modern times, people are increasingly seeking more aggressive returns, looking more toward assets such as properties or equities. Considering the performance of these asset classes over the past few decades, it’s not a surprise gold is being left behind. Additionally, gold as an asset is unable to create cash flows for its holder, while properties can be rented and equities can return value to shareholders through dividends or share buybacks.

An investment that hedges against inflation would generally rise along with the rapid growth in consumer prices. However, gold yielded a negative return for investors during some of the highest recent inflationary periods. Between 1980 and 2000, the price of gold lost over 40% of its value while the CPI rose nearly 120%.

Gold price (1980 – 2023 YTD, USD/oz)

Source: Bloomberg, InterCapital Research

Gold’s correlation to inflation (US) has been relatively low — 0.16 — over the past half-century. (This metric shows how closely gold and inflation track together. A correlation of 0 means there’s no relationship, while a correlation of 1 means they move in unison). This does not necessarily mean that gold makes a bad investment, it simply means that gold does not correlate with inflation and therefore does not provide protection against it. Rather, like many other investments, the price of gold moves based on investor sentiment.

In the COVID era, between January 2020 and mid-February 2022, there was a significant 21.4% increase in the price of gold, indicating a commendable return on investment. However, to evaluate gold’s potential as an inflation hedge, it has to be looked at as compared to the CPI during this period. During this same period, the CPI grew by 13.9%, which in the shorter term, meant that it was more attractive to investors. However, one also has to consider one other important factor: the fact that when gold starts being advertised as an effective “hedge” against inflation, the inflation rate is already high.

US CPI (YoY growth, 1980 – June 2023)

Source: Bloomberg, InterCapital Research

What we can take away from this, is that the price of gold is influenced by many other variables, then just inflation or gold’s correlation to it. Think of a scenario like this: in times when inflation is low, there are investments into gold for sure, but this is more determined by demand from investors/companies who actually need gold to do their business, such as jewelry or the industrial sector. During those periods, as we’ve seen in the last 10-15 years, investing in equity would have turned out to be a far better idea, as even though gold yielded some returns, it yielded far less. On the other hand, in periods of high inflation, when gold is promoted as a “hedge” against inflation, it’s already too late. Think of 2022, when inflation rates were above 10% (and still are in some places in 2023). For gold to be an effective inflation hedge, you’d have to buy it earlier, say at the beginning of 2021 before inflation started spiraling. And then you’d have to expect that other people will buy it too, to drive the price up, and act as the hedge against inflation. If you’ve been following the equity markets in 2021, then you’d know that for some of them, this was the best year on record. As such, in that period, it seemed like a more prudent idea to invest in equity. Of course, gold did not experience the decline that equities did due to the war in Ukraine and high-interest rates, but it also did not experience the same increase in the period before this.

What can be taken away from this? Holding gold for a longer period of time can be seen as a form of savings. Indeed, it does grow in price over time. At the same time, so do other asset classes. As such, maybe the best answer that can be given about gold, and its role as an inflation hedge is – it’s situational.

Abolition of Supplemental Health Insurance in Slovenia from 1 Jan 2024

Yesterday, the Act Amending the Health Care and Health Insurance Act came into force so as of 1 January 2024, supplemental health insurance will be abolished in its current form. Triglav will have this impact on 2023 results as currently, supplemental health brings losses as a result of the Slovenian Government setting the maximum price of supplemental health insurance premium in May, which is lower than the cost of services the social system provides.

According to the press release, the legal basis to abolish the existing supplemental health insurance system in Slovenia was adopted, which resulted in Triglav as well as 2 other supplemental health insurance providers no longer providing this type of insurance products in Slovenia, starting 1 January 2024. The Act Amending the Health Care and Health Insurance Act came into force so as of 1 January 2024, supplemental health insurance will not exist in its current form. Triglav will have this impact on 2023 results as currently, supplemental health has a loss ratio of more than 100%. it is very cyclical in nature and it depends on when social systems will provide services and bill insurance providers. So Triglav has in its first estimate mentioned impact might be even higher and result in 40% lower EBT for 2023.

Triglav notes that the effects of this change on the Group’s operations are tied to the way that this abolition was implemented. In accordance with its strategy, Triglav will continue to develop and strengthen complementary health insurance in the Adria region markets, which is one of the main pillars of its insurance activity.

We have already covered this change before, more of which you can read here. The news right now is that yesterday, 20 July 2023 the Act Amending the Health Care and Health Insurance Act came into force, ending the uncertainty regarding the changes to the supplemental health insurance system in Slovenia. As of 1 January 2024, supplemental health insurance will be abolished in its current form. This means that Triglav will no longer provide supplemental health insurance products in the context of the Slovenian public healthcare system as of that date. Furthermore, due to the same law, all the existing supplemental health insurance contracts in Slovenia will also be terminated on 1 January 2024.

Triglav notes that they expected these changes for many years, and as such they have taken them into account when it comes to the Group’s strategic development activities and plans. They further note, however, that the way these changes are implemented is unexpected, and the Group has already communicated its first estimates of the effects of these facts on its operations. They also note that they will continue to be strategically focused on complementary health insurance, which it sells and develops as commercial insurance products in the Adria region markets, and they expect these activities will continue in the future.

Upcoming Events – July 2023

Here you can find the dates for the upcoming events of the regional companies.

wdt_ID Date Ticker Announcement Country
8 18.7.2023 KRKG Krka ex-date Slovenia
9 20.7.2023 KRKG Krka Q2 2023 Results Slovenia
10 20.7.2023 ADPL AD Plastik General Shareholders Meeting Croatia
11 21.7.2023 PODR Podravka Q2 2023 Results Croatia
12 25.7.2023 ERNT Ericsson NT Q2 2023 Results Croatia
13 25.7.2023 ATGR Atlantic Grupa Q2 2023 Results Croatia
14 25.7.2023 TRP Teraplast Q2 2023 Results Romania
15 25.7.2023 ATPL Atlantska Plovidba Supervisory Board Meeting Croatia
16 26.7.2023 TRP Teraplast Q2 2023 Results Conference Call Romania
17 26.7.2023 ATPL Atlantska Plovidba Management Board Meeting Croatia
18 26.7.2023 ARNT Arena Hospitality Group Supervisory Board Meeting Croatia
19 27.7.2023 KOEI Končar Q2 2023 Results Croatia
20 27.7.2023 HT Hrvatski Telekom Q2 2023 Results, Conference Call for investors and analysts Croatia
21 27.7.2023 ARNT Arena Hospitality Group Q2 2023 Results Croatia
22 27.7.2023 ADPL AD Plastik Q2 2023 Results Croatia
23 28.7.2023 WINE Purcari Wineries ex-date Romania
24 28.7.2023 EQNX Equinox Q2 2023 Results Slovenia
25 28.7.2023 SNP OMV Petrom Q2 2023 Results, Conference Call Romania
26 28.7.2023 ATPL Atlantska Plovidba Q2 2023 Results Croatia
27 31.7.2023 RIVP Valamar Riviera Q2 2023 Results Croatia

Due to the nature of these events, they are subject to change (might be postponed or canceled).