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Many investors consider gold to be the ultimate safe-haven hedge against inflation. It’s been a store of value for thousands of years, and it has real-world uses in jewelry and electronics, which provides tangible value. And unlike fiat currencies, there is a relatively limited supply of gold.
Trouble is, gold has a mixed record when it comes to whether it can actually provide a good hedge against inflation. Let’s take a closer look at whether gold really works as an inflation hedge.
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How Does Inflation Affect Gold Prices?
Inflation typically has an indirect impact on the prices of commodities like gold. As prices rise across the economy, investors may buy more gold and other precious metals to preserve the purchasing power of their dollars.
In the first half of 2022, for instance, demand for gold increased 12% year over year. Consumer prices rose 9.1% over the 12 months that ended in June 2022. Research shows that between 1974 and 2008 there were eight years when U.S. inflation was considered high. During those periods, gold prices rose by an average of 14.9% year over year.
Some cite correlations like this when arguing that there is a connection between higher inflation and higher demand for gold. But it’s impossible to say whether higher inflation in these periods was directly responsible for growing demand for gold.
Higher demand might contribute somewhat to higher gold prices, but there are plenty of other factors that impact the price of gold. But experts suggest that supply factors and trading trends in futures markets probably have more material impacts on gold prices, not to mention investor sentiment.
Gold’s Historical Track Record as an Inflation Hedge
Lessons about gold’s track record as an investing hedge may be learned by looking back at the 1970s, when the U.S. experienced its last bout of high inflation.
Oil price shocks and energy shortages drove average annual U.S. inflation up to around 8.8% from 1973 to 1979. During those six years, gold won over many investors as a top inflation hedge, since the yellow metal generated an impressive 35% annual return.
While the 1970s played a big role in giving gold a shining reputation as an inflation hedge, its performance since that time has been lackluster.
From 1980 to 1984, annual inflation averaged 6.5%, but gold prices fell 10% on average each year. Returns not only fell short of the inflation rate, but they also underperformed real estate, commodities and the . Annual inflation averaged about 4.6% from 1988 to 1991, but gold prices fell approximately 7.6% a year on average.
“A hedge against inflation would typically increase in value in line with the sharp rise in consumer prices,” says Jason Porter, senior investment manager at Scottish Heritage SG. “However, during some of the most recent, extreme moments of inflation in the U.S., gold has produced a negative return for investors.”
Gold’s Performance as an Inflation Hedge Today
Gold appears to be having a comeback in 2023. In fact, the price of gold increased by 14% from November 2022 through February 2023.
But that leg up followed a relatively weak performance in 2021 and 2022. The consumer price index (CPI), a popular measure of U.S. inflation, gained 4.2% year over year in April 2021, its first annualized gain of more than 4% since 2008. While the average annual U.S. CPI growth was around 6.8% during those years, gold prices eked out an average annual growth rate of only 1% over the same period.
Darren Colananni, wealth management advisor for Centurion Wealth Management, says that gold’s recent weak performance reveals its shortcomings as an inflation hedge.
“Gold prices have actually been trading sideways to down for most of 2021 and 2022 while inflation was at multi-decade highs,” Colananni says.
Some studies have found that gold can be an effective inflation hedge, but only over an extremely long time horizon of more than a century.
Over shorter periods, researchers found gold’s inflation-adjusted price fluctuates dramatically. Since 1972, the ratio of gold’s price to the CPI has averaged 3.6. The current gold-to-CPI ratio is 6.4. If gold were a simple, reliable inflation hedge, its value would remain roughly constant relative to the CPI.
Gold vs. Bitcoin: Which Is Better for Inflation?
Gold may not have offered the best protection against inflation over the past two years, but it’s certainly outperformed another widely touted inflation hedge: Bitcoin.
Some cryptocurrency investors argue that crypto is the best inflation hedge because its supply is fixed. Central banks worldwide are free to increase the supply of money at will and miners can dig up more gold, but the total amount of Bitcoin and some other cryptocurrencies is strictly capped.
Crypto enthusiasts like to refer to Bitcoin as “digital gold.” In reality, Bitcoin’s recent performance as an inflation hedge has been rocky, at best, with cryptocurrency nearly 67% off its all-time high in November 2022.
The past two years have presented the first test of Bitcoin as an inflation hedge during a period of sharply rising prices, and it’s proven to be anything but digital gold.
What Are the Best Inflation Hedges?
Neither gold nor so-called digital gold has helped investors effectively fend off the current bout of inflation. So what are the alternatives?
Asher Rogovy, chief investment officer at Magnifina, says the best long-term inflation hedge has historically been the stock market.
“I’m always surprised how often investors forget that plain old stocks hedge against inflation over the long term,” says Rogovy. “Of course, stock valuations may fluctuate with the day’s economic news, but across multiple business cycles, market indices have significantly outperformed inflation.”
The may be volatile and unpredictable over the short term. But the S&P 500’s returns have been remarkably consistent when measured in decades.
Since 1926, the rolling annual 30-year S&P 500 return has stayed between about 8% and 15%. Returns like these are more than enough to hedge against all but the most extreme periods of inflation.
For investors uncomfortable with stock market volatility, the U.S. Treasury has designed a type of bond specifically to combat inflation. Colananni recommends I bonds as the best potential inflation hedge.
“The interest rate adjusts every six months with inflation and you can purchase up to $10,000 per person per calendar year,” he says.
I bonds currently yield 6.89% and are guaranteed by the U.S. government. But investors must hold them for at least one year and you lose the last three months of interest if you cash out inside of five years.
Benefits of Investing in Gold
Gold has been an inconsistent inflation hedge, but there may still be benefits to holding a small amount of the yellow metal in your portfolio. Gold has historically had a low or even negative correlation to both stocks and bonds, suggesting it offers value as a tool of diversification.
Gold prices held up pretty well during the Covid-19 pandemic market sell-off in early 2020, for example. From Feb. 1 to April 1 in 2020, the S&P 500 declined 23% while the price of gold dropped less than 0.1%.
Demand for gold from investors, central banks, jewelers and tech companies is also growing. According to the World Gold Council, global gold demand increased 28% year over year in Q3 of 2022.
Depending on your individual goals, there are several easy ways to invest in gold. Investors can buy gold bullion, physical bars or coins that can be kept in a safe or bank.
You can also buy physical gold exchange-traded funds (ETFs) that hold gold bullion on investors’ behalf. The most popular gold ETF is SPDR Gold Shares (GLD).
Investors looking to speculate in the gold market can trade gold futures contracts. These contracts provide significant leverage, allowing investors to control large quantities of gold with a relatively small amount of money.
Finally, investors can buy shares of individual gold stocks or a gold mining ETF. The VanEck Gold Miners ETF (GDX) holds a diversified basket of 54 gold-related stocks, including Newmont Corp. (NEM), Barrick Gold Corp. (GOLD) and Franco-Nevada Corp. (FNV).
Gold Inflation FAQs
Why isn’t gold rising with inflation?
There have been certain periods in the past when the price of gold rose faster than inflation, this has not always been the case. Rising prices throughout the economy are only one factor that influences the price of gold. Other key categories include supply of gold, investor sentiment and other commodity market dynamics.
How does gold perform during a recession?
Historically speaking, gold tends to perform well directly after a recession. For example, after rising only 2.5% in 2008, the PPI for gold increased 12.8% in 2009 as the U.S. continued to deal with the economic fallout of the Great Recession.
Alternatively, when the economy is stable and investors turn to traditional investments, like stocks and bonds, the price for gold tends to decline.
How can you hedge against inflation?
The best way to hedge against inflation is to invest in assets that maintain their value—or increase in value—over a specified period of time.
Although gold has proven its long-term value over thousands of years, there are other options. For example, since 1973, energy stocks have been the top-performing sector during periods of high and rising inflation. Other best inflation stocks include defensive sectors, like utilities, consumer staples and health care.
