As far as precious metals go, gold has no rival. Known as the “king of precious metals,” gold is considered a store of wealth dating back to recorded history.
Today, gold continues to be one of the most valuable commodities on the planet in terms of value and beauty.
If you’re even a tiny bit familiar with investing, you’ve probably heard gold being called an inflation hedge, a safe haven, and a good store of value.
But what do these actually mean? How can gold protect your savings and assets from rising consumer prices? What makes gold a good inflation hedge, exactly?
Before we dive into gold as an inflation hedge, let’s define inflation first.
What is inflation?
Inflation is the rate at which prices for goods and services go up and purchasing power goes down. In simple terms, the value of your money goes down as inflation rises.
Let’s say you bought an apple for $2 today. That same apple could cost $2.25 next year if the annual inflation rate gets higher.
This is why most people, particularly those on a fixed income, struggle to buy even basic commodities during an extended period of high inflation and consumer prices.
As a result, it’s important for potential gold investors to understand inflation risk because it has such a direct effect on the price of gold, aka the future value of your investment.
Does inflation make gold prices go up or down?
Generally, it’s safe to say that an increase in inflation is a good thing for gold prices.
Gold is well-known as a hedge against inflation, so when there is an increase in the price of goods and services, the demand for gold increases as well. Typically, gold prices rise in response to increased inflation, but it does have a mixed track record.
Of course, there are other factors that affect gold prices besides inflation. The state of the economy, manufacturing rates, interest rates, and debt all play a role in determining gold price and demand.
But as a general rule of thumb? When inflation goes up, so does the price of gold.
Is gold a good inflation hedge?
Yes, gold is a good hedge against rising inflation and other economic crises like hyperinflation and recessions.
Based on historical data, gold holds its value better than stocks, dollar currency, and other asset classes because it is a finite resource.
Here’s a quick comparison of gold and other asset classes:
Gold versus Stocks
Unlike gold, stocks are more vulnerable to the fluctuations of the market both in the USA and other countries.
They tend to rise and fall with the economy, which makes them more volatile than other investments. If the stock market crashes, it should be expected that your stocks will lose some or all of their value.
Not only that, but stocks represent partial ownership in a company—if that company does badly due to factors such as inflation, investors may lose some or all of their funds,
For instance, the SPDR Gold Trust, which is a stock-exchanged ETF, dropped out of the top 10 largest ETF funds in the world after being the second largest worldwide.
In contrast, the physical gold standard price has steadily risen in value despite a few periods of negative return.
Gold versus Fiat Currency
Fiat currency, on the other hand, rises and falls with inflation. That’s because as more money supply is released into circulation by the federal reserve, all that money starts having less buying power.
While you can invest in other assets tied to the federal reserve like treasury inflation-protected securities, their price is still partially set by a government and central bank that may not be stable or economically sound.
Gold Versus Bonds
Bonds are linked to interest rates and therefore can go up and down in price as interest rates fluctuate.
This isn’t necessarily bad. It just means that as an asset class, they’re more volatile than gold and might not offer the best long-term investment strategy against inflation.
However, these assets can still be risky for gold investors who want to diversify. How much they’re worth is also based on the financial health of the government or institution that holds them. If they go bankrupt, you can lose everything you put into your bond investment.
On the other hand, they are usually safer than other asset classes; they’re just not as stable as the price of gold over time.
In contrast, the price of gold stays steady because it does not fluctuate with inflation as other dollar-denominated asset classes do.
In fact, this precious metal is pretty much unaffected by inflation at all except for some short-term price fluctuations.
When you invest in gold, you’re buying something that will hold its value for centuries. This makes gold a really safe investment if you’re worried about the stability of your portfolio.
How does the consumer price index affect gold price and value?
The Consumer Price Index (CPI) is a measure of the average change over time in prices paid by urban consumers for a market basket of consumer goods and services. Experts also use it as part of calculating inflation—the rise in the cost of living from one year to the next.
So if the CPI says that prices have risen 2% from this time last year, then a good or service that cost $1 last year now costs $1.02.
If you buy gold bars in December but don’t actually sell it until February, when the price has gone up 2%, then you’ve made money on it.
Therefore, if you’re planning on investing in gold, it’s good to keep an eye on CPI and how it can cause higher gold prices.
When is the best time to buy gold?
The best time to invest in gold depends on what you want to do with your investment. Here are some tips:
- If you want to buy as a hedge against inflation, then the best point in time is when the dollar is weak and inflation rises, and the Fed doesn’t raise higher interest rates.
- If you want to buy gold for use in manufacturing, then the best time is when the costs of gold are low and you expect it will rise.
- If you want to buy gold as a safe haven, then the best time is when you’ve already diversified your portfolio but still have some money left over.
The bottom line: investing in gold isn’t as simple as “buy low and sell high.” If you’re looking for a get-rich-quick scheme, such as how some people view other cryptocurrencies, this may not be the market for you.
But if you want long-term financial security, then gold is one of the best ways to protect yourself during turbulent economic periods.
Is gold jewelry a good investment?
Yes, gold jewelry is a great investment, but it’s not as simple as buying any old piece of jewelry and hoping for the best.
To maximize the price of gold you’re buying, here are a few things to keep in mind:
- Look for gold with a high karat value.
Karat is the percentage of gold relative to other materials like silver and copper.
- Check out the provenance.
Did your piece come from a reputable dealer or designer? Did it come from an auction house? Is there anything that makes its backstory special?
If so, this can drive up its value and make it easier to sell when you’re ready.
- Is it rare?
Unusual pieces, like antique jewelry or rings made by unusual designers, may appreciate more quickly than your average gold chain.
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