Jan 2024


Jan 2024

Exploring the Role of Gold as an Effective Hedge Against Inflation

By StoneX Bullion

Gold has long been regarded as a symbol of wealth and stability, highly revered for its ability to weather economic storms. Its reputation as being a ‘safe-haven’ that shields investors against inflation and economic downturns makes it an alluring investment during periods of instability - but does this reputation hold up? Is gold a good hedge against inflation or is it all speculation?

In this article, we explore how inflation affects gold prices, gold's history as an inflation hedge, and whether it still stands a strong shield against inflation today. We also look at how gold compares to bitcoin and the benefits of investing in physical gold.

What is inflation?

Inflation refers to the increasing price of goods and services over a period of time. During periods of rising inflation, there’s a decline in purchasing power. This means that a unit of currency buys less goods and services than it did in a previous period.

There are various reasons why inflation happens, including rising wages, increased production costs, higher demand, expansionary monetary policies (i.e. printing more money), or supply chain disruptions.

In moderate amounts, inflation is a natural part of a healthy economy. But when inflation is too high, it can have detrimental effects and lead to decreased consumer purchasing power, higher interest rates, and sluggish economic growth.

What is an inflation hedge?

One way that investors can prepare for inflation is by investing in asset classes that tend to outperform the market during periods of high inflation. These are known as ‘inflation hedges’.

To put it simply, an inflation hedge is an investment that protects investors against the negative effects of inflation. These assets tend to maintain their value, and sometimes even increase in value, during periods of high inflation.

When it comes to gold, for example, its price tends to increase as the value of the dollar goes down. If someone already owns a 10g Argor-Heraeus gold bar when inflation strikes, they can get more dollars per ounce of gold than they could before. This means that during inflation, gold investors can sell their gold for a higher price.

How inflation affects gold prices

Let’s dive a little deeper into the relationship between inflation and gold prices.

When inflation rises, conventional assets like stocks and bonds tend to depreciate in value. To preserve the purchasing power of their money, investors turn to gold and other precious metals. This rise in demand drives up the price of gold and increases its value.

CFP Hanna Horvath explains the relationship between inflation and gold prices this way: “[As] inflation often leads to a decreasing value of currencies… investors turn to gold as a hedge against the potential loss of value in their portfolios. This fundamental relationship between the value of currencies and the demand for gold means that as inflation increases, so too can the price of gold”.

Some people argue that the mere expectation of inflation can skyrocket the price of gold. When investors predict high inflation in the future, they tend to prepare by buying gold in anticipation. This can create a self-fulfilling prophecy that drives up demand for gold and increases its price, even if inflation doesn’t end up happening.

Gold’s history as an inflation hedge

The reason why gold is often referred to as a good inflation hedge is because it has historically been proven to perform that way. The best example to look at is the United States during the 1970s.

During this period, the US experienced a period of high inflation, driven by various factors like rising oil prices, increased government spending, and economic instability. The value of the US dollar declined significantly during this time. As inflation surged throughout the decade, the stock market crashed while the price of gold skyrocketed from $35 per ounce to $850 per ounce by January 1980.

A more recent example is the period after the global financial crisis of 2008 and the economic uncertainty which followed. While not strictly due to inflation, rising concerns about the stability of major currencies and fears of inflation encouraged investors to turn to gold to preserve their wealth. The result was a significant surge in gold’s price, climbing from around $800 per ounce in 2008 to over $1900 per ounce by 2011.

These events aren’t anomalies - they’re part of a pattern of gold outperforming other investments during periods of economic turbulence. In fact, data shows that gold’s price has increased during six of the eight largest market crashes since the late 70s.

Gold as an inflation hedge today

History demonstrates that gold has the power to shield investors against the ill-effects of inflation. But does its value still hold up in today’s climate? To better understand the role of gold as an inflation hedge today, we’ve turned to expert opinion.

Colin Plume, founder and CEO of Noble Gold Investments believes that the precious metal is and will remain to be a good hedge against inflation. “I don’t think that will ever change”, says Plume. “There’s a reason central banks use this [yellow metal] to hedge the wealth of their own country and billionaires use gold to hedge their billions”.

Before you put all your money into gold, however, try to think about it as a long-term investment rather than a short-term way to bypass inflation. Like any other investment, gold is likely to fluctuate in price and you may need to wait for long periods to see a profit.

American Prosperity Group founder and CEO, Mark Charnet, explains that “I think that gold is always a good hedge against inflation but it ultimately depends on the holding period of the investor who must be geared to hold [it] for at least a year or more". This is supported by the World Gold Council, which believes that gold’s value as an inflation hedge lies in holding it long-term rather than expecting short-term benefits.

Is gold a better inflation hedge than bitcoin?

Another argument that’s been coming up in recent years is whether gold is a better inflation hedge than bitcoin and other cryptocurrency. Dubbed as ‘digital gold’, some investors are claiming that bitcoin offers an alternative way to hedge inflation in the digital age - but how does it compare to gold?

This is a difficult one to get into because there’s a real lack of history when it comes to bitcoin. Unlike cryptocurrency, gold has a long-established history of being a reliable store of value. You only have to scroll up in this article to see historical data that backs gold as an inflation hedge. With bitcoin, on the other hand, there’s no established proof that it has what it takes to get through economic turbulence. Because it’s still relatively new, it’s difficult to prove its long-term viability.

That’s not to say that bitcoin isn’t an inflation hedge. It very well could be, there’s just no data to back it up. So if you’re looking for a trusted, proven inflation hedge then gold - which has maintained its value over thousands of years - seems to be a sensible choice.

Benefits of investing in physical gold

One thing is clear: gold has the potential to hedge against inflation and protect investors from economic turbulence. But there are many other reasons why owning physical gold is a valuable investment, whether you own gold bars, gold coins or jewelry. We always recommend physical gold over gold futures contracts or exchange traded funds (ETFs).

If you’re on the fence, below are just some examples of why you should invest in gold:

  • Diversify your portfolio: To properly diversify your investment portfolio and decrease risk, you should be investing in gold as well as stocks and bonds. This is because gold has a low correlation with traditional assets and has been shown to move independently of these markets. In other words, when stocks are down gold tends to be up.

    Diversifying is an essential investment strategy that can cushion your portfolio from drastic fluctuations and reduce losses during economic downturns. For example, between October 9, 2007, and March 9, 2009, the S&P 500 (often used to represent the US equity market) fell 56.8%. Over the same period, gold price increased by 25.5%.
  • Preserve your wealth: Gold is a tangible asset, which makes it an excellent store of value across time as well as geographical boundaries. It will always be in demand, it has intrinsic value, and it offers investors stability and security that few other assets can match.
  • A hedge against inflation: As you may know by now, gold has long been considered a reliable shield against inflation. If its past performance is anything to go by, gold will retain its value during inflation and even increase in price. This can safeguard your purchasing power despite fluctuations in currency and increased cost of living.
  • High liquidity: One of gold’s greatest assets is that it’s one of the few tangible assets that’s highly liquid. Unlike real estate, stocks, bonds, or collectibles, gold can easily be exchanged into cash when you need money. It can easily be bought or sold to jewelry dealers, pawn shops, coin shops, and traded across various platforms globally. This means you can easily convert your gold holdings into cash when needed.

Hedge against inflation with gold investments

To sum it up, gold is perceived as a safe-haven inflation hedge because that’s precisely how it has performed during inflation: by maintaining its value and even increasing in price while other asset classes take a nosedive.

To truly benefit from gold’s value as an investment hedge, you need to buy it before the economy begins to falter. This means the best time is now. 

At StoneX Bullion, we sell investment-grade gold bullion bars and coins in a wide range of pieces for all kinds of investors. You can start your gold investment journey with something as small as a 1g Valcambi gold bar, or if you’re ready to go all in, consider preserving your wealth with a 1 oz Argor-Heraeus gold bar. However you choose to invest in gold, when you buy with us you can rely on high quality products that will stand the test of time.