Gold vs. the S&P 500: With Inflation at a 3-Year High, Which Does History Say Wins?

The S&P 500 is a long-term play on the largest companies in America.

The optimistic investment has a brighter future than the pessimistic one.

Rising energy costs and the Middle East conflict drove U.S. inflation to a three-year high in May. According to the Bureau of Labor Statistics, prices rose 4.2% over the previous 12 months, accelerating from its 3.8% increase in April. That pressure could force the Federal Reserve to raise its benchmark interest rates to throttle economic growth and tame inflation.

However, the S&P 500 is still trading near its all-time highs and looks historically expensive at 32 times earnings. Meanwhile, gold -- the conventional hedge against inflation -- has retreated about 24% from its record high of $5,589 per troy ounce in January.

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So is it smarter to invest in the SPDR Gold Trust (NYSEMKT: GLD) , the world's largest gold ETF , instead of the Vanguard S&P 500 ETF (NYSEMKT: VOO) , the top S&P 500 ETF ? Let's compare their historical performance and see if gold can bounce back and outperform the S&P 500 over the long run.

Most major currencies, including the U.S. dollar, were once backed by gold. But today, they're all fiat currencies that are backed by public trust in the issuing government. Over time, fiat currencies lose their value because central banks increase the money supply and lower borrowing costs to stimulate economic growth.

Since gold is valued in U.S. dollars, those expansionary monetary policies make gold more valuable as the dollar weakens. That's why gold's spot price rose 655% over the past 20 years. Meanwhile, the same item that cost $1.00 in 2006 would cost $1.66 today.