Is Gold a Good Investment to Protect Against Inflation?
Staying up late watching cable TV may lead to you seeing an infomercial encouraging you to purchase gold as it protects against inflation and protecting purchasing power.
Unfortunately, evidence points towards gold as not being an effective inflation hedge; its performance during periods of high inflation has been disappointing.
It’s a safe haven
Although gold’s track record as an inflation hedge may be mixed, it still provides value as a diversifier. Gold typically exhibits low or negative correlation to stocks and bonds, providing some portfolio stability during times of inflation. Gold prices were relatively stable during early 2020’s S&P 500 selloff caused by Covid-19 pandemic when S&P fell 23% while gold declined less than 0.1%; additionally demand continues to increase from investors, central banks jewelers, technology firms – according to World Gold Council data, global gold demand increased 28% year over year in Q3 2022!
Gold’s price usually increases when real interest rates decline and turn negative, signaling high inflation. If investors expect that the Federal Reserve will raise rates aggressively to combat it, gold may prove less useful as an inflation hedge than expected.
It’s a store of value
Though it can be hard to know whether gold is an effective investment for protecting against inflation, some believe its monetary properties make it a solid store of value. Unlike paper money which can be printed as needed and printed back out again later, gold has proven its reliability over time.
Some investors consider gold an effective hedge against inflation than Treasuries, since Treasuries offer only fixed returns without protection against inflation. As an alternative, investors may purchase Treasury Inflation-Protected Securities (TIPS) that adjust their prices automatically when inflation occurs.
Note, however, that despite recent inflationary pressures, gold has not performed particularly well as an inflation hedge over the last two years – in fact it’s been an extremely disappointing investment due to various factors – political events or otherwise – making a diversified portfolio an effective way to protect against inflation.
It’s a hedge
Gold has long been considered an effective hedge against inflation. Laffer Tengler Investments’ Nancy Tengler noted on CNBC’s “Trading Nation” that gold does not correlate well with consumer price indexes and returns have lagged them since 1970, but can sometimes provide relief against rising costs.
Gold offers numerous advantages to investors, not the least of which being its ability to help diversify a portfolio. Unlike stocks which tend to decline when inflation rises, gold’s prices tend to remain less volatile.
Gold may seem an ideal inflation hedge; however, that does not make it the ultimate protection from rising inflation. When inflation rises, central banks usually attempt to combat it by increasing interest rates; this may cause gold prices to decline since it will no longer provide protection. Therefore it’s essential to understand all aspects of including gold in your portfolio before making decisions – for instance a gold ETF that invests in Treasuries may be the ideal solution.
It’s a good investment
At a time when inflation rates in the US are at historic levels and interest rates remain at all-time lows, people worry that their purchasing power is diminishing and that their savings and investments may suffer irreparable damage. Gold can serve as an inflation hedge while also offering protection from currency crises or political unrest.
Gold has an unparalleled 3,000+ year record of maintaining its value, unlike fiat money which depreciated. Furthermore, due to its negative correlation with stocks markets, when stock markets drop gold rises more than it falls. Investing in gold may therefore prove profitable in terms of maintaining value over time and protecting capital investment portfolios from falling markets.
However, investors seeking to hedge against inflation would do well investing in Treasuries. Treasury Inflation-Protected Securities (TIPS) provide real returns that adjust with inflation risk while offering real returns that are adjusted over time. TIPS are available through many brokerage firms but typically require large initial investments – also being less accessible globally.
Categorised in: Blog