Does Gold Protect Against Inflation?

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Gold is often seen as a hedge against inflation, as its price tends to rise during periods of economic instability and rising prices. It holds its value better than many other assets, but its long price cycles and lack of regular income can be drawbacks. Assets such as real estate and cryptocurrencies can also offer effective alternatives for hedging against inflation.

Global inflation is commonplace. Almost everyone has already accepted that it is here to stay. Rapid depreciation of money significantly affects purchasing power, forcing people to spend actively in order not to lose value. And this drives up prices even more. In order not to fall into consumerism, many investors are looking for ways to protect their savings. One of the popular tools for this is gold, which has historically been considered a reliable means of protection against inflation.

"Golden" principles of protection against inflation

Gold Spot / U.S. Dollar

For centuries, gold has been used as a means of saving and exchange. Unlike paper currencies, which can be printed in large quantities, gold retains its value due to its rarity and stability. This makes it an attractive asset during periods of economic instability. To add to it, gold has unique physical properties: it is resistant to corrosion, has a high density and conducts heat and electricity well.

However, the main value of gold lies in its limited reserves. Gold is not subject to inflation, since its amount on Earth is strictly limited, and the extraction of new reserves requires significant costs and efforts.

That is why during periods of economic instability, the demand for gold invariably increases, as investors look for safe assets. Naturally, this leads to an increase in its price. Since the supply of gold on the planet is limited, this also supports its value. In 2024, the historical record price of gold was reached on October 30, when the cost of a troy ounce of gold rose to $ 2,787 and the metal is not going to stop at this level.

Gold as a store of value

History shows that gold has always maintained its value during periods of high inflation. For example, during the hyperinflation in Germany in the 1920s or in Zimbabwe in the 2000s, gold provided a hedge against the depreciation of national currencies. In these situations, the value of local currencies fell sharply, while gold, on the contrary, retained its purchasing power, allowing people to protect their savings.

According to Charles Schwab and Fidelity, gold has shown good returns during periods of rising inflation. For example, in the 1970s, when inflation in the United States was high, the price of gold rose from about $35 per ounce at the beginning of the decade to more than $800 per ounce by 1980. In recent years, during the economic instability associated with the COVID-19 pandemic, gold has also shown significant growth, reaching an all-time high in October 2024 at $2,787 per ounce.

A comparison of gold with stocks, bonds, and real estate shows that gold often outperforms these assets in high inflation environments. Stocks and bonds can lose value due to currency depreciation and a decrease in purchasing power. Real estate can also lose value due to economic instability and changing market conditions. While gold maintains its value and can even rise in price, serving as a safe haven for investors.

Historical data and empirical studies therefore confirm that gold is indeed a reliable store of value in high inflation. Investors seeking to protect their savings from depreciation often turn to gold as a safe and stable asset.

How to heal against inflation with gold

Investing in gold offers several different approaches, each with its own characteristics and benefits.

Physical gold. One of the most traditional ways to invest is to buy physical gold. This can be in the form of gold bars, coins, or jewelry. Physical gold allows investors to own an asset that is independent of electronic systems and financial institutions.
Gold ETFs. Gold-linked exchange-traded funds (ETFs) are funds that track the price of gold and trade on exchanges like regular stocks. Purchasing gold ETFs gives investors exposure to the gold market without having to physically own the metal. It also eliminates the need to worry about storage and security.
Gold stocks. Investing in stocks of companies involved in gold mining and refining also provides an opportunity to benefit from changes in the price of gold. Gold mining stocks can show significant returns during periods of rising gold prices, as the profitability of their operations increases. However, in addition to market risks, these companies are also exposed to operational and management risks.

To actively trade gold, you don't necessarily have to own it. You can use tools such as ETFs, stocks, CFDs, futures, options. Access to trading here is provided by brokerage companies. We have selected several such brokers. The key criteria when choosing a broker are low commissions, access to a wide range of markets, etc.

Best brokers for gold trading
	Min. deposit, $	Max. leverage	XAU/USD spread, pips	XAU/USD commission, $	Open an account
Plus500	100	1:300	45	3	Open an account Your capital is at risk.
Pepperstone		1:500	22	3,5	Open an account Your capital is at risk.
OANDA		1:200	30	3	Open an account Your capital is at risk.
FOREX.com	100	1:50	35	2,5	Study review
Interactive Brokers		1:30	15	2	Open an account Your capital is at risk.

Portfolio diversification with gold

Investing in gold can be an important element of portfolio diversification. Gold often performs differently from stocks and bonds, which helps reduce overall portfolio risk. In times of economic uncertainty and market volatility, gold tends to rise, which offsets losses in other assets. Thus, gold can act as an “insurance” for a portfolio, maintaining its stability.

Risks and benefits of investing in gold

Risks:

Price volatility. The price of gold is subject to significant fluctuations. However, this usually occurs over long periods of time. It can fluctuate significantly due to various factors such as interest rate changes, political instability, and global economic events.
No income. Unlike stocks and bonds, gold does not generate regular income. It does not pay dividends or interest, making it less attractive to income-oriented investors.

Benefits:

Inflation protection. One of gold’s main advantages is its ability to maintain purchasing power in the face of inflation. Historically, gold has demonstrated price increases during periods of high inflation, protecting investors’ capital.
Stability in crisis periods. Gold is often seen as a “safe haven” during times of economic instability. When financial markets are stressed, investors often turn to gold, which leads to an increase in its price. For example, during global financial crises or political conflicts, demand for gold increases sharply, which invariably confirms its status as a reliable asset.

Alternatives to gold for inflation

While gold has historically been seen as a reliable hedge against inflation, there are other assets that can serve a similar role. These include real estate, commodities, and cryptocurrencies. Each of these assets has its own advantages and disadvantages that need to be considered when choosing an inflation hedge.

Real estate is a popular hedge, especially in an inflationary environment. It has physical value and can generate income in the form of rent. Historically, real estate values tend to rise with inflation as home prices and rents increase.
Commodities such as oil, gas, metals, and agricultural products can also serve as a hedge against inflation. Commodity prices often rise with inflation as the cost of extracting and producing them increases. Commodity investments can be made through futures, options, or commodity ETFs.
Cryptocurrencies such as Bitcoin and Ethereum are a new asset class that is increasingly being seen as a hedge against inflation. Cryptocurrencies are highly volatile and can provide significant returns over short periods of time. Some investors see them as digital gold due to their limited supply and decentralized nature.
Stocks. Investing in stocks as a strategy to hedge against inflation can be effective, provided you choose the right types of stocks and sectors (Real Estate Investment Trusts (REITs), commodity-linked stocks, defensive stocks).

Brokers with assets available to hedge inflation
	Crypto	Commodities	Stocks	Open an account
Plus500				Open an account Your capital is at risk.
Pepperstone				Open an account Your capital is at risk.
OANDA				Open an account Your capital is at risk.
FOREX.com				Study review
Interactive Brokers				Open an account Your capital is at risk.

Consider gold only as a long-term investment

When considering gold as a strategy for protecting capital against inflation, it is important to consider several key factors. First, gold has traditionally been used as a safe haven during periods of economic instability, as its value tends to rise when other assets fall. This makes gold an effective tool for preserving purchasing power in an environment of rising prices.

However, when investing in gold, one must be aware of its long cycles. Gold does not always effectively protect against short-term inflation, but is actively used by speculators and market makers for market manipulation. The price of gold can decline significantly from its peaks, and you will be left holding the asset for a long time without income.

Over the long term, however, gold certainly retains its value, but it does not generate the steady returns, such as dividends or interest, that other assets can generate.

Therefore, to minimize risks, I recommend viewing gold exclusively as a long-term investment, as well as diversifying the portfolio by including other safe haven assets. For example, adding gold in combination with stable stocks and bonds can provide a more balanced and inflation-resistant portfolio.

When deciding to invest in gold, it is important to consider not only market trends, but also your individual financial goals and risk tolerance. Consulting with a financial advisor can help determine the optimal investment in gold and choose the right instruments, whether it is physical gold, ETFs, gold mining stocks, etc. This comprehensive approach will ensure maximum capital protection in the face of inflation.

Conclusion

In summary, gold is a proven hedge against inflation, maintaining its value during periods of economic instability. Investing in gold can be part of a portfolio diversification strategy, helping to reduce risk and preserve savings. According to leading investment firms, gold will continue to play an important role in hedging against inflation. Demand for gold is expected to remain high, supporting its price. In the current economic environment, where inflation remains high, including gold in an investment portfolio is a wise move to protect against the depreciation of money.

FAQs

How can storing physical gold affect your investment?

Storing physical gold requires you to consider additional costs and risks, such as the need for secure storage, insurance, and transportation. These factors can increase the overall cost of investing and should be considered when deciding whether to purchase physical gold.

What advantages do gold ETFs provide over physical gold?

Gold ETFs offer a simpler and more accessible means of investing in gold without the physical costs of storage and security. They also allow you to easily buy and sell gold on an exchange, which provides greater liquidity than physical gold.

How has the view on gold as a safe haven changed in recent decades?

The view on gold as a safe haven has changed slightly in recent decades, in part due to the rise of alternative instruments such as cryptocurrencies and TIPS. However, gold remains a popular hedge against inflation due to its long history and resilience in economic uncertainty.

How do changes in interest rates affect the price of gold?

When interest rates rise, the cost of storing gold increases, which can make it less attractive to investors. Conversely, when rates fall, gold becomes more attractive because alternative income-producing assets yield less.

Team that worked on the article

Maxim Nechiporenko has been a contributor to Traders Union since 2023. He started his professional career in the media in 2006. He has expertise in finance and investment, and his field of interest covers all aspects of geoeconomics. Maxim provides up-to-date information on trading, cryptocurrencies and other financial instruments. He regularly updates his knowledge to keep abreast of the latest innovations and trends in the market.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

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