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What Is the Relationship Between Inflation and Gold?

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

How Are Inflation and Gold Related?

It might seem logical to assume that when inflation goes up, the price of gold automatically goes 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 prices of goods and services—such as housing, food, fuel, transportation, and clothing—and is often measured by the Consumer Price Index (CPI). Physical gold can help serve as a shield against the weakened purchasing power of paper money that arises from a broad increase in the prices of goods and services. This is why gold is commonly referred to as a hedge against inflation.

Gold's Performance as an Inflation Hedge

Gold has long been considered a popular choice as a hedge against inflation. This is because of the precious metal’s historical track record of retaining its purchasing power during periods of high inflation. According to data from the World Gold Council (WGC), gold has outperformed inflation by an average of 3% per year over the past four decades.

In recent years, gold’s performance as an inflation hedge has been particularly impressive. As of March 2023, gold prices remain elevated, reflecting ongoing inflationary pressures and the continuing uncertainty in global financial markets. Analysts continue to view gold as a key inflation hedge and a respected asset for diversifying portfolios.

How Does Inflation Affect Gold?

Inflation—the rate at which the general level of prices for goods and services is rising—tends to have a positive effect on the price of gold. Gold prices might go up when asset holders flock to the precious metal and thus drive up demand amid fears of inflation going up. But while you might see the inflation rate and the price of gold rise or fall at the same time, inflation and gold don’t move in a lockstep fashion.

Gold has long been considered a safe-haven asset during times of economic uncertainty and inflationary pressures because it is perceived as a store of wealth that retains its purchasing power over time. According to the WGC, gold has historically outperformed other asset classes during periods of high inflation, such as during the 1970s when the price of gold increased from around $35/oz. to over $800/oz. Central banks around the world continue to hold gold as part of their currency reserves, further emphasizing the importance of gold as a store of wealth during uncertain times.

Experts still see gold as a hedge against inflation and a potential diversifier in portfolios during low-yield environments. Request your free Gold Information Kit to learn more about the benefits of increasing your gold holdings with help from U.S. Money Reserve.

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