Is Gold a Hedge Against Inflation?

Gold is considered a hedge against inflation because it can maintain (or even gain) value while other currencies weaken due to inflation. Historically, it has performed well and protected investors against erosion in purchasing power. But gold’s performance is influenced by more than buying power. 

Market sentiment, global economic conditions, and current interest rates all play a role in dictating gold’s price action. Yes, gold can act as a hedge against inflation, but its effects will vary. Keep reading because we’ll discuss how gold is best used as a way to diversify your investment strategy rather than a guaranteed solution against inflation. 

Gold’s role as an inflation hedge

In the late 1970s and early 1980s, gold demonstrated its ability to hold value while the U.S. dollar, which was unlinked from gold, came crashing down. Its scarcity and global market demand make it an appealing investment. But gold doesn’t always track with inflation. 

Gold’s ability to hedge against inflation is limited because other economic factors influence its price action. For example, when real interest rates (inflation-adjusted interest rates) are favorable, gold’s price declines because investors flock to other investments for potentially higher returns. Short-term spikes in inflation have little to no effect on gold’s price, making it ineffective as an immediate hedge.  

Despite these limitations, gold is valued worldwide, and many smart investors use it to diversify their portfolios. It’s historically stable during a global economic crisis and worth its weight as a long-term investment. Considering it a useful tool rather than a surefire remedy for inflation is a more balanced view that weighs its strengths and limitations. 

Inflation and gold: a historical perspective

Gold prices surged in the 1970s as inflation skyrocketed due to oil embargos, which caused a sharp rise in oil prices worldwide. The U.S. dollar was at its weakest, and gold was seen as a good place to store value. This is a unique case and doesn’t indicate how gold performs against modern-day inflation. 

The relationship between inflation and gold is much more nuanced. In the 1980s, gold’s price peaked and began to settle down when interest rates rose and inflation settled. There’s no doubt that gold performed well during this inflation period, but this case is a better indicator of how gold is a good store of value during long-term economic volatility rather than inflation alone. 

We’ll explore alternative assets and analyze how gold compares to other hedges. 

What do experts say about gold as an inflation hedge?

Experts are divided on gold’s role as an inflation hedge, mostly due to other economic influences on its performance and pricing. The World Gold Council emphasizes gold’s value as a long-term inflation hedge versus currency devaluation and supply-driven inflation. 

In the 1990s, gold’s link to short-term inflation in the U.S. and the Consumer Price Index weakened after the introduction of Treasury Inflation-Protected Securities (TIPS).

The price of gold has been rising in 2024 on the back of geopolitical tensions, central banks including China stepping up purchases of gold, and expectations that the Federal Reserve lowering rates could trigger a rise in inflation. 

In 2024, inflation has been falling steadily while gold prices have risen. If you review the other dynamics for gold this year and its demand, you can see it is rising due to other reasons. Gold is a store of value, but can be a unreliable hedge against inflations. 

I would look at a small allocation of gold to help with an already diversified portfolio.

Eric Kirste, CFP®

The Chicago Fed adds that gold prices often respond to inflation expectations. Gold becomes more attractive as real interest rates decline and inflation expectations rise. It’s important to note that this movement is based on speculation about inflation pressure, not inflation itself.  

The CFA Institute warns that gold’s relationship with inflation is unstable and it is an unreliable inflation hedge. Gold may protect your purchasing power during inflation, but its performance is inconsistent. Instead, the CFA suggests using gold as a diversifier for your portfolio rather than a guaranteed inflation safeguard. 

An inflation hedge should move with inflation. When inflation goes up, so should the hedge. The claim that gold hedges inflation is therefore testable.

CFA (Chartered Financial Analyst) Institute

Why does inflation happen?

Inflation happens because the demand for goods exceeds the supply and causes prices to rise. This is known as demand-pull inflation. According to the Harvard Business Review, supply shocks can also cause inflation by disrupting an industry and driving costs up. 

In addition, consumer expectations and our money supply contribute to spurring inflation. If people expect costs to rise, they will demand higher wages. Businesses raise prices to match the higher wages, creating a “wage-price spiral ” that leads to inflation. 

Too much money will also cause inflation. An increase in the money supply means consumers have more to spend. But without an increase in the supply of goods, consumer demand will simply drive up prices and lead to inflation. 

Gold’s performance as a hedge during inflation depends on the specific cause of the inflation. If the cause is demand-driven, its performance will vary because of other economic factors like real interest rates. If the cause is cost-driven, it will perform well because gold holds intrinsic value. 

What makes an effective inflation hedge?

An effective inflation hedge protects your buying power when your currency’s value declines. Common characteristics of an effective inflation hedge are limited supply, intrinsic value, and strong demand. Gold ticks all three of these boxes, but lacks the direct correlation to inflation found in other assets, such as TIPS. 

Alternative inflation hedges vs. gold

There is certainly more than one way to diversify and hedge for inflation. Real estate, Treasury Inflation Protected Securities (TIPS), stock, and commodities all offer protection against inflation. Here is a comparison of each option and its benefits. 

Hedge	Best for	Benefits
Gold	Economic instability, long-term inflation	Physical asset, limited supply, long-term value
Real estate	Rising property values	Physical asset, rental income
TIPS	Direct inflation hedge	Government-backed, low-risk
Stocks	Outpacing inflation with corporate earnings	Dividend and growth potential
Commodities (energy and agriculture)	Supply shocks	High returns during volatility (due to price increases on essential goods during inflation)

Gold vs. real estate 

Real estate is a neutral investment strategy to hedge against inflation. It generates cash flow through rent and property appreciation. Gold will not generate cash flow, but it is more liquid and easier to sell than real estate. 

Gold vs. TIPS

Treasury Inflation-Protected Securities are government bonds that give you direct inflation-adjusted returns. So if inflation rises 2%, your returns will rise to match. Stable returns and minimum risk are more appetizing to conservative investors.

Gold vs. stocks 

Consumer goods stocks can hedge against inflation when businesses raise prices to match higher costs. They also have the potential for growth, and some pay out dividends. A well-diversified portfolio that contains gold should likely also include stocks.

Gold vs. commodities (energy and agriculture)

Commodities such as oil and natural gas have strong yields during an inflation-driven supply shock. Gold is more stable long term, but commodities provide higher short-term gains during inflation. Gold, however, isn’t affected by supply chain issues. 

Should you invest in gold?

Gold is resilient, especially during economic downturns. It’s a valuable addition to any investor’s portfolio. Consider opening a gold IRA if you’re looking to safeguard your retirement savings from inflation. Reliable gold dealers can walk you through purchasing and storing your gold safely while retaining all the tax benefits an IRA has to offer. 

In my professional experience, we look at the client’s current situation and look for sources that may be susceptible to inflation: low growing assets or too much cash, for example. Then we review how inflation may affect them in the short and long term. This may cause adjustments to the overall planning and making changes to their investments.

The asset classes mentioned above all assist with diversification efforts and combating rising inflation. Those investments may be purchased in liquid form and can be easily added to a portfolio.

Eric Kirste, CFP®