Gold in times of inflation

April 20, 2022
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As the global economy recovers from the pandemic, many investors are concerned about the relatively unfamiliar idea of rising inflation, especially in the US, where investors have been accustomed to low inflation levels for more than three decades.

You often hear or read that gold provides a hedge against inflation. And this is one of the biggest concerns for investors right now as they flock to safe-haven assets.

In this guide, we'll talk about is gold really a hedge against inflation and should you be investing in it?

What is inflation?

Before we delve into details, let's start with the basics of inflation.

Inflation is defined as a long-term increase in the pricing of goods and services. It equates to a fall in the purchasing power of your money. As a result, it requires more currency units to buy the same product.

Gold and inflation, a look back

According to a World Gold Council analysis based on data dating back to 1971, gold has returned 15% per year on average when inflation has been greater than 3%, compared to just over 6% per year when inflation has been less than 3%.

Gold returns

When we analyze the evidence more closely, we get a different scenario. For example, suppose we consider not only year-on-year changes but also movements in both directions. In that case, we can see that, while gold appears to be a decent hedge against inflation over the long term, its abilities in this regard are less conclusive over shorter periods.

Is investing in gold the right option during inflation?

As many investors seek haven in gold during inflation, history suggests otherwise.

In principle, an investment that hedges against inflation would rise with the rapid rise in consumer prices. However, during some of the most recent periods of excessive inflation, gold provided a negative return to investors.

For example, investors profited greatly from 1973 to 1979, when yearly inflation averaged 8.8 percent. As a result, gold returned an astounding 35%. On the other hand, investors lost 10% on average from 1980 to 1984, when annual inflation was 6.5 percent.

So, why do we see an increase in prices?

There are two factors for the rise in Gold price during inflation or uncertain times.

Fear/opportunity is the one factor that drives the prices of gold.

During economic downturns, investors rush to gold. Gold prices surged during the Great Recession, for example.

However, gold had already increased until 2008, approaching $1,000 per ounce before dropping below $800 and then bouncing back and climbing when the stock market bottomed out. Nonetheless, gold prices climbed even as the economy improved.

Due to many geopolitical issues, including Brexit, and the US-China trade war, the precious metal has been in surge mode since the end of 2018, a phase that remained until mid-2020 due to the COVID-19.

In March 2022, gold hit an all-time high of $2074 because of the ongoing global inflation and the Russian-Ukrainian war.

Gold hit an all-time high

Another element driving the price increase is gold's positive price elasticity. This effectively implies that when more individuals purchase gold, the price rises with demand. It also implies that there are no underlying inflationary factors influencing the price of gold.

If investors begin to flock to gold, the prices go up regardless of the economic situation or monetary policy.

What factors do you need to consider other than inflation?

The rise and fall of gold prices depend on various factors. While gold provides a good hedge against inflation, there are several factors you need to consider before investing.

Supply and demand

Because global demand for gold remains high, especially in the jewelry and industrial sectors, its price is influenced by the fundamental supply and demand principle, which states that when demand is high, prices rise.

Value of USD

Because gold is a dollar-denominated precious metal, the value of the US dollar has a direct impact on its per-ounce price. As a result, gold prices tend to fall when the dollar appreciates, and vice versa.


Because gold is regarded as a safer investment by investors, its demand can skyrocket during times of global crises or geopolitical upheaval.

In terms of economic viability and stability, metal outperforms all other assets. Because gold's acquisition and output costs are rarely affected by significant fluctuations, the element is extremely durable, and supply is sufficient to comfortably fulfill demand.

When to start investing in gold?

As dependable as gold is as a long-term store of value, the gold price is sometimes volatile in the short term. Moreover, because of its dual purpose as a rare commodity and a store of wealth, the evolution of the gold price is influenced by a far greater number of factors.

As an investment safeguard, gold may so disappoint in the near run. A rising inflation rate certainly increases demand for gold, but other factors might negatively influence the gold price.

So, when is the best time to buy gold?

The answer is always - as long as you're in it for the long run.

Gold's strongest asset is its impact on a portfolio, even though it looks not a perfect hedge in terms of inflation. However, when coupled with a range of assets, gold's performance begins to shine.

Historical pricing data may also assist investors in determining the best time to buy gold based on demand. For example, when a weakening US dollar caused the gold price to fall in the past, when did it begin to climb again when demand increased?

Such analysis can help show the optimal moment to buy to get the most value from your gold.

Gold prices from 1900 to 2020

Understanding past gold prices allow you to develop predictions about the metal's future path and make more educated decisions about whether to buy and sell.

Final thoughts

In the long run, gold should retain its value in the face of inflation. However, it may or may not be an effective hedge in a shorter timeframe.

Another article you might like is The effect of interest rates on Gold and Millennials

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