NEW YORK (TheStreet) -- With gold's big decline over the last two years, many may be searching for answers about what's to come. And suggestions abound -- some hinging on the notion gold can protect your portfolio from inflation.In an environment where many fear quantitative easing (QE) will drive inflation higher, it's not surprising to hear gold bugs offer similar advice: Don't sell -- hang on and profit when QE-driven inflation increases gold's value. In our opinion, however, there are severe problems with this thesis. Here are two key ones: Quantitative easing isn't inflationary, it's dis- or deflationary, and gold isn't a reliable hedge against inflation. For starters, QE has existed for nearly five years, and inflation's been nothing more than sluggish. The Federal Reserve may be buying bonds and adding to banks' excess reserves, but that money isn't going anywhere, as you can see in Exhibit 1.
Today, gold is down 31.5% from its 2011 peak as of July 17, according to the St. Louis Fed -- by definition, a bear market, illustrating that not only is gold not an inflation hedge, it's also not a stable store of value. Neither is it an effective hedge against equity market volatility -- just consider the 2000s: Gold rose alongside stocks from late 2002 through 2007. When the financial panic hit, gold fell, as did stocks. There was divergence briefly (from roughly November 2008 to February 2009), but even when gold has risen and stocks fallen, equities have gained more value over the years than gold. So why do some investors insist on gilding their portfolios? Most likely because myths persist despite gold's historical performance. Since the end of post-Bretton Woods controls allowed gold to begin trading freely in 1973, the shiny metal has traded like any other commodity, and it's one with very few physical demand drivers. It trades largely on sentiment, which explains its historical volatility. But investors haven't historically been compensated for this volatility. According to finance theory, volatile assets like gold should have potential for equally high returns to make them worth the risk. Yet, over time, gold has underperformed stocks. In our view, investors seeking long-term returns should leave the golden nest egg to the golden goose. Other investments seem much more attractive, in our view. This article was written by an independent contributor, separate from TheStreet's regular news coverage.