Is Gold a Good Investment to Protect Against Inflation?

Is gold a good investment to protect against inflation

Gold has long been seen as an effective bulwark against inflation. Over the long run, its returns have outshone both price and money supply inflation.

Gold may not provide an effective inflation hedge. From 1980-1984, its returns fell short by an average of 10% of inflationary increases.

1. It’s a store of value

Gold supporters frequently cite its ability to protect against inflation as one of their primary motivations for investing in this precious metal. Over long time periods – decades and centuries in fact – gold bullion has outshone price and monetary inflation.

But investors should be wary that gold’s performance has varied during recent inflation spikes due to its dollar-denominated value fluctuating depending on inflation and other market forces.

One factor contributing to inflation is real or inflation-adjusted interest rates, which have recently fallen into negative territory and appear likely to remain so for the foreseeable future due to central banks raising rates. When real rates reach such low levels, selling gold – which does not offer interest returns – to invest in assets which do offer returns is expensive – prompting some investors to seek alternatives like TIPS as an inflation hedge; their success will ultimately depend on how severe and sustained is inflationary pressure is.

2. It’s a hedge

Gold can serve as an inflation hedge if it is owned in coins, bars or jewelry form; however, investors should take note of potential storage and security costs, transport costs and insurance requirements before investing.

Gold’s reputation as an inflation hedge stems from its historic performance during periods of high inflation, for instance during the 1970s when annual inflation averaged 8.8%.

Kosmala notes that gold has had an approximately 0.34 correlation with inflation over the last century; this figure compares favourably with TIPS which had an almost 0.21 correlation.

Gold’s performance as an inflation hedge has declined over recent years, due to increased interest rates from the Federal Reserve and an increase in money market funds and Treasury bonds that offer better yields than gold, leading to reduced demand for yellow metal despite inflation reaching new heights. Gold prices have thus experienced relative price falls relative to consumer prices since March 2021 despite inflation reaching new heights.

3. It’s a store of power

Gold has long been valued as a store of value, but whether or not it can protect against inflation is often debated. Inflation refers to how many goods or services a set amount of money can buy; understanding this concept will give you greater insight into your purchasing power.

Gold can serve as a store of wealth due to its inelastic supply and relative rarity; however, its performance as an inflation hedge varies with periods of above-average inflation seeing investors experience losses on average while those experiencing below-average inflation see gains on average.

Gold doesn’t directly correlate to inflation; like stocks and real estate investments, its performance depends on how strong or weak the dollar is. Still, its systemic risk protection should be considered when building an inflation-protecting portfolio; just be wary of purchasing it because you think a period of high inflation might be around the corner.

4. It’s a store of knowledge

Gold has long been seen as an effective hedge against inflation. Many investors hold onto the belief that physical metal holds its value while paper money diminishes over time, however this assumption doesn’t always hold up under scrutiny.

At times of high inflation in the US, gold prices actually decreased despite being an effective inflation hedge with consumer prices going up alongside.

However, other ways of investing in gold that provide protection from inflation include sovereign gold bonds. These investments offer higher yield than gold ETFs while having lower fund management fees – plus they’re backed by real gold that can easily be retrieved should an emergency arise! Plus they may outshout stocks and Treasury Inflation-Protected Securities (TIPS).


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