Relationship Between Gold and Inflation

What Is the Relationship Between Inflation and Gold?


Written by John Rothans

Jul 29, 2020

We’ve explored the relationship between gold and oil and gold and interest rates. But how about gold and inflation? In the current economic environment, understanding how the two are tied together is critical.

How Are Inflation and Gold Related?

It might seem logical that when inflation goes up, the price of gold would automatically go up, too. But it doesn’t quite work that way. There’s no direct correlation between inflation and the price of gold. In fact, gold can act as a hedge against inflation. That’s one of the best ways to make sense of the relationship between gold and inflation.

Inflation happens when a jump occurs in the overall price of goods and services such as housing, food, fuel, transportation, and clothing. But gold helps serve as a shield against the weakened buying power of paper money that arises from a broad increase in the price of goods and services. This is why it’s common to hear gold referred to as a hedge against inflation.

Research by the World Gold Council shows that between 1974 and 2008, there were only eight years when U.S. inflation was high (5% or above). During that time, gold prices climbed by an average of 14.9% year-over-year, outpacing assets like bonds, equities, and other commodities.

During years of moderate inflation (between 2% and 4.9%) or low inflation (below 2%) between 1974 and 2008, gold notched “mildly positive” real returns, according to the Council.

How Does Inflation Affect Gold?

There is a correlation between inflation and gold—gold can be lifted by high inflation. Gold prices might go up when asset holders flock to the precious metal and thus drive up demand amid fears of inflation going up. Yet inflation and gold don’t move in a lockstep fashion, although you might see the inflation rate and the price of gold rise or fall at the same time.

“All real assets will benefit from higher inflation, but gold is more than just a real asset; it is the monetary asset of choice,” Diego Parrilla, a managing partner with Spain’s Quadriga Asset Managers, told The Wall Street Journal in May 2020. “In the battle of the currencies, gold will win.”

The bottom line is that gold can be a hedge against inflation and diversify a portfolio during good and bad times.

“My thesis for thinking that gold makes sense within a portfolio rests on this idea that the Federal Reserve will choose to overshoot, rather than risk deflation. The risk of inflation is far more palatable than any deflation,” Tim Shaler, chief economist at iTrustCapital, claimed in June 2020. “If somebody is concerned about future inflation, then gold is an appropriate part of somebody’s portfolio.”

According to Shaler, for people with a long-term outlook on their assets, holding 10% of their portfolio in gold makes a lot of sense in the current economic environment.

“A 10% allocation to gold makes a lot of sense because gold has a very low correlation to the overall stock market and to the overall bond market and how portfolios decrease risk at a given return expectation,” he said. “Ten percent is enough to create a low, a correlation factor within your portfolio.”

Gold has long been recognized as a hedge against inflation. Learn about the benefits that can come with increasing your gold holdings with help from U.S. Money Reserve. Call now to lock in up-to-date prices on gold bars, coins, and bullion.


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