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Gold price vs inflation: How well does gold keep up with inflation?

Gold price vs inflation: How well does gold keep up with inflation?
Nemanja Curcic

Gold has witnessed astronomical prices lately, and even set an all-time record of $2,431.52 per ounce on April 12. Furthermore, it has been widely credited as an excellent hedge against inflation as it behaves differently than most other financial assets. Today’s article will reveal the gold price vs. inflation relationship, how well gold keeps up with inflation, and whether you should rely on it as a hedge.

Gold’s surprising performance in 2024

Although it is currently trading lower than its April 12 peak, gold remains above $2,250, which is about 38% higher than its last low in October 2022.

Gold is a commodity with a reputation for flourishing during recessions and bear markets when investors abandon riskier assets like equity for “safe” options such as gold and bonds. Therefore its recent highs have come as a surprise since the last several months were a period of market rally, with assets overperforming in general.

Under-performing dollar and plummeting bond rates are part of an explanation. The lower the rates, the lesser their advantage over gold since gold pays no interest. However, this event calls into question the common perception of gold as doing “inversely” to the general market.

As it shows, things are never black and white in the market.

Is gold a good investment?

Historically, there have been two reasons why people consider gold a safe haven during high inflation:

  1. The long-standing tradition of the gold standard: Banks and treasuries have backed currencies with gold reserves in previous centuries. In fact, gold has been the main currency for thousands of years, and when paper money gets shaky, investors return to tangible currency with physical value;
  2. Gold’s reputation for holding value: Gold is known to preserve value and even surge during periods of high inflation. When prices rise across the market, investors purchase more gold and precious metals, increasing their demand.

Gold’s reputation as an investing hedge in popular opinion can be traced to the 1970s during America’s last high inflation period. The energy crisis raised the annual inflation rate to about 8.8% from 1973 to 1979, and during that period gold provided a whopping 35% annual return.

However, remember how things are never black and white in the market? 

Gold price vs inflation: Historical data

Since the 1970s, gold’s role as an inflation hedge has been tarnished. During the early 1980s, annual inflation averaged 6.5%, but gold prices actually dropped by 10% each year. In fact, gold underperformed real estate, commodities, and even the S&P 500 during the period. Similarly, from 1988 to 1991, annual inflation was 4.6% on average, but gold averaged an annual drop of 7.6% during the same period. 

An effective hedge against inflation would increase in value together with a rise in consumer price, but the price of gold has shown inconsistent price patterns that tricked many investors into a negative return.

Gold price vs. inflation (US Consumer Price Index vs. gold price). Source: en.macromicro.me
Gold price vs. inflation (US Consumer Price Index vs. gold price). Source: en.macromicro.me

Value investors don’t like gold

Gold has built an infamous reputation as a commodity you invest in and hope its value never goes up.

“When everything else is going down the tubes, gold is the one thing that’s likely going to do well. Home insurance also has a high return when you have a fire.”

William Bernstein, The Four Pillars of Investing

Gold’s notoriety comes from the fact that it cannot produce or provide any value. Warren Buffet, one of the most famous investors in the world and a proponent of value investing, has denounced gold on several occasions.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

– Warren Buffett in his 2011 letter to shareholders

Warren Buffet’s strategies against inflation include investing in strong brands and less capital-intensive businesses. He also advises people to invest in themselves and acquire practical skills that never devalue with time, including courses, training, and diplomas. 

How well does gold keep up with inflation – the bottom line

While at times gold displayed remarkable resilience and the ability to act as a hedge against inflation, the track record of that power remains somewhat unreliable as there have been years and periods of particularly high inflation when gold yielded negative returns for investors.

Therefore, investors placing their bets on gold should limit their exposure and think of it not as a way to earn money but as an extinguisher to keep nearby in case bad wiring sets their place on fire. Everything beyond that would come dangerously far from investing and close to gambling.

Conversely, and somewhat anticlimactic, stocks, particularly the S&P 500 index, are the safest hedge against inflation in the long run.

Gold price vs inflation: S&P 500 vs. gold price.
S&P 500 vs. Dow Jones, gold, and silver. Source: longtermtrends.net

So, gold’s power against inflation can be potent but remains notoriously unreliable. Turning more than a fraction of your portfolio gold comes with many risks: do your own research before investing.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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