Many people view gold as an inflation hedge because they think it retains value when paper money collapses or loses value. Usually, history shows that.
Many seasoned investors see precious metals as beneficial when building their portfolios. Robert Kiyosaki, the best-selling author of the Rich Dad, Poor Dad series, recently told Kitco News that these assets are “insurance” rather than an investment.
“My answer is always to buy more gold and silver,” said Kiyosaki. “It’s not an investment… I buy gold and silver for one reason: because if push comes to shove, I can spend it anywhere in the world.”
George Bee, CEO at U.S. Gold Corp. told U.S. News & World Report that gold has been a proven inflation hedge because it has proven that it can store value over many years.
“You cannot conjure it up with printing presses,” Bee said. “It must be hard-won from the earth’s natural resources. It’s held its value and allure for thousands of years.”
However, recently, some serious doubt has been cast upon gold’s role as an inflation hedge.
Gold as an Inflation Hedge
In August 2020, gold reached a record high of $2,058.40 while the inflation rate was at 1.3%. Inflation didn’t affect gold because fears of the COVID-19 pandemic were driving gold prices in 2020.
In contrast, America’s inflation rate rose to 9.1%—the highest level in 40 years—in June 2022. Yet, gold was trading for $1,806.08 on July 1, 2022.
Gold prices fell in the summer of 2022 as inflation continued. Gold was trading at $1,662.58 on Sept. 15, 2022. Yet, the U.S. inflation rate was 8.3% in August 2022.
Gold is losing value as inflation rises. Thus, gold is not an attractive inflation hedge in today’s market. However, some experts say that should change when the Fed reverses its policy-making decisions.
The yellow metal is constantly competing with other investments like the U.S. dollar and Treasurys. As the Fed raises interest rates in its inflation battle, those other interest-bearing investments begin to look more attractive.
However, gold was an excellent hedge during America’s last bout of inflation. Gold reached a high price of around $666 a troy ounce on Sept. 1, 1980. The 1980 gold price approximates $2,396.51 in 2022 dollars, according to the US Inflation Calculator.
Gold was an excellent inflation hedge back then because the U.S. inflation rate was 12.8% in September 1980. The gold price rose to new highs as inflation rose.
Let’s jump back to 2020 when the world was consumed by the COVID pandemic.
With much of the global economy shut down or running on a minimal scale, demand for most goods and services was exceptionally low, a factor working against monetary inflation. As far as the surge in pricing, it just highlights one of the other fundamentals about gold. With fear mounting and cracks in society showing, gold stood tall as a reliable currency.
With most wide sweeping covid measures being rolled back with the economic machine in full gear, demand sharply rose which coupled with blowback from government stimulus and long-standing monetary policy has led to an enormous spike in inflation. Investors holding paper versions of gold like ETFs have responded to the devaluing of the dollar just like stock investors: by selling, leading to a drop in price.
It’s very likely that aforementioned history will repeat itself in the near future. As the Fed has reversed course to handle that inflation, raising interest rates can create a great opportunity for gold to shine.
Most experts agree that this inflation battle will throw the U.S. economy into a full-blown recession. Recessions typically trigger a rise in precious metals. If the Fed doesn’t have the stomach to follow through with this necessary evil and reduces interest rates to stimulate the economy, then gold will have another opportunity to perform well in the presence of inflation.
Those who doubt the value of gold as a hedge rightfully point to clear statistics, but without proper context the truth is lost.
How Inflation Impacts Prices
Inflation is one of many factors that affect gold prices. Other factors that raise gold prices include fears of catastrophic events. For example, gold topped $2,000 in August 2020 at the height of the COVID-19 pandemic.
In 1980, fears that the Cold War could soon turn hot drove gold prices. High gold prices came after the Soviet invasion of Afghanistan in December 1979. The gold price rose from nearly $530 on Dec. 3, 1979, to more than $650 on Jan. 1, 1980. Yet, gold prices later fell as investors learned that Soviet troops were bogged down in a destructive guerrilla war.
Gold and the Stock Market
Other factors that affect gold prices include the performance of other investments. One reason gold prices were so high in 1980 was fears that the stock market was losing its value.
On Aug. 13, 1979, an infamous Businessweek magazine featured the headline “The Death of Equities: How Inflation is Destroying the Stock Market.” Such fears drove many people who normally buy stocks to invest in gold.
Notably, gold prices trended down as the stock market boomed throughout the 1990s.
History shows poor stock market performance can sometimes drive gold prices up. However, poor stock market performance doesn’t always boost gold prices.
Is Gold an Inflation Hedge?
History shows that gold can serve as an inflation hedge.
It’s important to note that investors seeking an inflation hedge need to consider building a portfolio of investments that could include precious metals (like gold and silver) along with others such as real estate, stocks, currencies, cryptocurrencies, and other instruments.
As U.S. News & World Report notes, “investors who hold the metal as a small, defensive portion of their portfolio may find that over long periods of time it holds its worth better than currencies managed by central banks.”
So, basically, if a quick flip for profit is what you’re looking for, gold may not have been the best option lately. However, if your goal is long-term wealth preservation and preparing for what lies ahead, the choice is simple.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.