Gold vs Inflation: An Investment Worth Considering?

Written By Colin Kuehn  |  Gold 

We are a reader-supported website. That means we may earn a commission if you click links on our site and make a purchase. This is not financial advice. We recommend consulting with a professional for guidance about your specific situation.

Augusta Precious Metals logo

Want to Purchase Gold as an Inflation Hedge? APM is Our Top Choice

  • Reliable and Trustworthy 
    When you choose Augusta for your gold IRA needs, you can be confident you're working with an extremely reliable company, whom you can trust with your gold and silver investing needs.
  • Simple 3 Step Process
    Rolling over your IRA or 401k is often the best way to get started investing in Gold or Silver. August has a simple 3-step process for using your IRA to investing in gold and silver, and they'll be there to walk you through the entire process.

During inflation, gold is one of the safest assets to hold.

The reason being is that gold is a non-volatile asset and is undervalued compared to other assets like equities.

It is also a safe haven for investors who feel uncomfortable or uncertain about other assets. In fact, gold prices have historically had an inverse relationship with interest rates.

a man stares at a chart showing interest rate hikes

Gold During Inflation

Traditionally, interest rates and gold prices have a negative correlation. But there is no single reason why that is. Gold prices are sensitive to long-term real interest rates, and they usually fall when rates rise.

Interest rates on the other hand, are directly related to the strength of the economy. When the economy is in recession, people tend to flee from high-cost investments, like bonds, and reinvest in lower-cost ones. This results in a weaker dollar, which makes gold more attractive to foreign buyers. However, a weak dollar can also lead to a lower gold price.

When Rates Rise

When interest rates rise, money flows into bonds and stocks, which have higher yields. Gold prices are likewise swayed by interest rate movements, as the value of gold tends to rise when inflation rises.

In the past, real interest rates and gold prices have been shown to have an inverse relationship. But there are other factors at work, so it's hard to say exactly which is the best time to invest in gold.

Gold as an Inflation Hedge

Gold is also a good hedge against inflation, which means it can help offset the loss of purchasing power of dollars. It also has a relatively stable dividend yield, which can offset the effect of interest rates on the price of gold.

However, when inflation is high, gold tends to rise, since it doesn't generate a dividend. When inflation is low, however, it's generally a bad time to invest in gold. It's a better idea to put your money in other investments, like government bonds or stocks. This is because they tend to be more stable.

Three Main Factors Influencing Gold Price

There are three main factors that influence the gold price: supply and demand, inflation, and interest rates. While interest rates and gold prices aren't exactly related, they are likely to be closely related. Generally, the price of gold increases when inflation rises, but falls when interest rates fall.

RELATED: How to Get Gold for Your IRA

As the economy improves, real interest rates will also improve. This is because the opportunity cost of holding bonds or cash will increase. This means investors will prefer investments with higher yields, like bonds.

a bar of gold sits atop an investment chart

Is Gold Really a Non-Volatile Asset?

Historically, gold has served as a hedge against inflation, but in recent years it has also been a strong performer in a deflationary environment. Investing in gold can help limit inflation losses and maintain the real value of your portfolio.

Gold prices have increased over the last two decades in inflation-adjusted terms. Gold prices have also climbed considerably in nominal terms. Nevertheless, gold has failed to match inflation during periods of sustained inflation.

Gold and Inflation

Gold prices have been driven by three common drivers: expected inflation, long-term real interest rates, and pessimism about future macroeconomic conditions. However, gold's performance relative to inflation varies widely depending on the time period measured.

Demand's Influence

Expected inflation has been a primary driver of gold prices. Historically, the rise in CPI has been correlated with a rise in gold prices. In other words, a rise in inflationary expectations leads to a rise in nominal interest rates. As long as real interest rates remain negative, gold is likely to continue to be a strong hedge against inflation.

Gold prices are also driven by demand for the commodity. For example, if there are disruptions to the refining or transportation supply chain, the premium may increase. It is also possible for gold prices to increase when global gold demand increases. However, these factors are not guaranteed.

Pessimism about future economic activity was a significant driver of gold prices until 2001. The co-movement between gold prices and inflation increased in the 2000s. This resulted in a lower average return for gold than other assets.

Gold is not a good hedge against inflation in China. According to a study by Bialkowski et al., gold does not have a significant relationship with CPI in China. However, the coefficient associated with Dcpi t - i is very low.

In contrast, a study by Wang et al. examines the relationship between gold prices and inflation in the United States. They use both long-run and short-run threshold models. In their model, the positive long-run effect coefficient is small and insignificant. However, the short-run coefficients are significant.

Gold prices may be a good hedge against inflation, but they are not a good hedge against equities. If you are concerned about inflation, it may be a good idea to diversify your portfolio with other asset classes.

Gold is often a safe haven by investors in times of uneasiness

Historically, gold has been perceived as a safe haven for investors in times of inflation or economic uncertainty. The price of gold has typically outperformed stocks and bonds during uncertain times. However, this is not always the case.

Although gold's long history of being a stable medium of exchange has contributed to its value, it is not a foolproof investment. There are risks involved, and it will not offer the same returns as stocks. A smart strategy is required to invest in gold.

Gold can be purchased through a traditional brokerage account or gold mining ETFs. It is also possible to buy physical gold. However, physical gold is a relatively costly investment. It is also not very liquid. It requires extra storage and would require an investor to have additional security.

Gold is a safe haven during times of inflation and uncertainty, but it may not be the best investment for all investors. Generally, investors allocate a percentage of their portfolio to safe haven assets to protect their wealth and reduce risk.

Gold's status as a safe haven asset can depend on the volatility of the financial markets in which it is held. Gold prices generally rise when the financial markets are volatile and decline when they are less so. The most common drivers of gold's decline are a strong dollar, high interest rates, and an increase in the price of oil.

If you are interested in buying gold, you will want to take the time to learn more about the asset. It is also important to understand that the price of gold can fluctuate based on the price of other commodities, and its value can be deriving from scarcity. You should also make sure that you are buying physical gold. It can be stolen, and may not be as liquid as other investments.

You should also understand that a diversified portfolio can protect you during periods of uncertainty, and may even serve as a safe haven during COVID-19. If you need to invest during this time, consider a combination of gold and other safe haven assets, like bonds and crude oil.

Some say Gold is undervalued compared to equities

Despite the recent downturn in the US stock market, there is still a lot of optimism surrounding the potential for gold to be an undervalued asset during inflation. As a long-term inflation hedge, it offers investors a way to avoid market turmoil and keep their portfolios balanced.

When inflation is high, stock prices are undervalued, and when inflation falls, stock prices tend to be overvalued. This is known as stagflation, and it's a dangerous combination of high inflation and stagnant economic growth. It can wreck havoc on fixed-income assets and equity. But some stocks are better suited to withstand this combination, and can deliver market-beating returns.

Gold has become a safe haven investment for many investors. The price of gold has climbed because of inflation, widening credit spreads and general economic uncertainty. But is gold a better investment than equities during inflation?

The gold price has increased in value during inflation, but it's been relatively depressed during the recession. The price is 35% below its record high of $1,925 an ounce. It's not clear that the price will be able to rise as high as its record high in the coming months.

The Federal Reserve has tried to lower inflation by raising interest rates. This has led to a drop in stock prices, but it is also making borrowing money more expensive. Hence, investors are now skittish about a recession. The S&P 500 index entered a bear market on Monday.

The S&P 500 index has fallen 20% since the start of the year. But, as the Fed continues to hike interest rates, it's possible that stock prices may fall even more. Luckily, there are a number of undervalued stocks to buy today.

Investors can find undervalued stocks by doing proper due diligence. Commodities are also undervalued, and can deliver market-beating returns. Commodity stocks are known for volatility, but a sustained rise in commodity prices could add fuel to the fire.

Some of the best undervalued stocks to buy now include Pfizer (NYSE:PFE), Vale (NYSE:VALE), JPMorgan Chase (NYSE:JPM) and Qualcomm (NASDAQ:QCOM). Investors looking for dividend stocks can find many more undervalued names.

Last Updated: December 2, 2022