5 Things You Didn’t Know About Gold as an Inflation Hedge

And Just Why Do We See Gold as an Inflation Hedge Anyway?

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By Alice Walker
Investor Relations Manager at Bullion.Directory

In my 14 years working in the wealth advisory field, I’ve seen the ever-changing dance of the financial world and it’s effects on people’s wealth first hand.

Amidst shifting trends and uncertain markets, one asset remains remarkably steady: gold. Gold has long been considered an effective hedge against inflation, a shield protecting your wealth from the erosion of purchasing power.

But there’s more to this precious metal than initially meets the eye. I want to share with you five important facts around the role of gold as an inflation hedge – you may not know.

The History of Gold as an Inflation Hedge

As I regularly emphasize, our relationship with gold as humans spans back several thousand years. Ancient civilizations were drawn to gold, not just for its shining beauty, but also for its ability to maintain its value consistently.

From the Pharaohs of ancient Egypt to the sprawling Roman Empire, gold was valued and used as a form of currency, its worth recognized universally.

Bringing the lens to more recent history, gold’s value has demonstrated remarkable resilience in the face of economic crises. During the 20th century, times of economic turbulence and inflation often resulted in a surge in gold prices.

The 1970s provide a prime example, when inflation ran rampant and gold prices experienced a massive increase as they became separated from gold’ fixed price in relation to the US dollar.

My own grandfather often regales me with tales from that period, recounting how his stock investments took a significant hit, but his gold investments remained robust and reliable. Back then as a regular guy owning gold he was a bit of an outlier, but it was a decision that helped save his family and my mother from a period of destitution.

We don’t need to look too far away to see whole countries where owning wealth in gold is the absolute norm: the Middle East and India are prime examples where a bulk of a families wealth is typically held in gold.

Turbulent times still see gold meet new highs. One only has to look to the crash of 2008-2010 and closer still to the pandemic, when gold reached new highs at a time when stock markets and other paper assets were cratering.

Read: Why we should hold gold in our IRAs

Gold protects, pure and simple.

Gold and the Dollar: An Inverse Relationship

The interaction between gold and the U.S. dollar is a fascinating dance to watch. When one rises, the other typically descends.

This inverse relationship is an essential piece of the puzzle in understanding why gold serves as a beneficial hedge against inflation. (It can have a similar inverse relationship with stocks too, hence it’s use as a market hedge)

Inflation manifests when the purchasing power of a currency (in this case, the U.S. dollar) gradually diminishes. It’s been doing this ever since the US came off the gold standard, freeing successive governments to service their debts by magicking new money into existence from nothing.

Millions, then billions and now multiple trillions of dollars were printed each time the government needed to buy new votes. With a country awash with new paper currency and nothing to back it up – the dollar starts hemorrhaging value through inflation.

The result? Each dollar purchases fewer goods and services than before.

Consequently, when inflation devalues the dollar, the price of gold tends to go up.

Investors are more likely to seek refuge in gold as a safe store of value when they perceive the dollar as weakening. Therefore, if you’re invested in gold during an inflationary period, the value of your investment is highly likely to rise, effectively offsetting any losses incurred due to inflation.

An inflationary period like now.

Gold: A Truly Global Currency

While different nations trade in their unique currencies, whether it be dollars, euros, or yen, there exists one form of currency universally recognized: gold.

Whether you find yourself in the hustle and bustle of New York City or the vibrant markets of New Delhi, gold is valued. Its universal acceptance is another element that reinforces gold’s role as a hedge against inflation.

With BRICS nations looking to pull away from the US dollar as the currency of choice for global trade, where is it they’re looking? Gold.

Consider this scenario: if the value of your savings account drastically plummets due to inflation, your gold investment remains globally valued. The dollar may be weak and getting weaker, but gold remains strong. With inflation in major Western countries currently running at between 8-80% it’s only going to become stronger.

In a world where economies are deeply interconnected, gold provides an additional enormous advantage. I’ve had clients who have moved abroad or conducted international business, and they’ve found that their gold investments can act as a significant financial cushion in times of currency volatility.

Needing to deal in a local currency that’s losing value at 20% a month, you’re going to be very glad of that cushion.

Gold’s Crucial Role in Central Banks’ Reserves

Did you know that central banks across the globe include gold as part of their reserves? And that many are now buying up as much gold as they can physically acquire – with some major players attempting to buy up the gold reserves of entire continents?

This isn’t merely because they have an affinity for shiny objects (though I can’t deny that gold’s luster is impressive). These institutions understand the financial stability that gold offers.

When a nation’s finances are backed by gold, it instills a sense of security and trust. This is a clear message to investors that the country’s reserves (and therefore it’s currency) are on a strong foundation, which can help stabilize the currency’s value even during periods of economic uncertainty.

This growing preference of central banks for gold serves to further boost gold’s value, which benefits individual investors like you and me.

As the dollar gradually fails, are we going to see a new gold standard? Leading economists seem to think so. One thing is for sure however – across history all fiat (unbacked) currencies fail eventually. No exceptions.

The Perks of Owning Physical Gold

Finally, I don’t want to overlook the simple yet significant advantage of investing in physical gold, such as gold bars and coins.

When you own physical gold, you hold a tangible asset that has intrinsic value. It’s not subject to the same risks as financial assets like stocks and bonds, which can be influenced by company performance and global economic crises.

We all know people who, during the 2008 financial crisis, felt the ground shift beneath their feet as stock portfolios plummeted.

Those of us who held physical gold assets, however, remained resilient, with our gold providing the financial safety net as it is supposed to.

Plus, there’s something to be said about the peace of mind that comes from holding a solid gold coin or bar in your hand, knowing it holds its weight in value.

Gold, the time-tested metal, has a lot to offer to investors. Its historical role as a store of value, the inverse relationship with the U.S. dollar, its acceptance as a global currency, its prominence in central banks’ reserves, and the advantages of owning physical gold all contribute to its effectiveness as an inflation hedge.

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