The case for gold as a hedge
Paper currencies lose purchasing power over time, while the supply of gold grows slowly. That's the core argument: an ounce of gold has bought roughly a similar amount of real goods across long spans of history, even as dollar prices of everything rose many times over.
When it worked
The 1970s
After the US ended the dollar's link to gold in 1971, inflation surged through the decade. Gold went from its old official price of $35 an ounce to a peak of around $850 in early 1980, far outpacing prices in general.
After 2008
Following the financial crisis, with interest rates near zero and fears about money printing, gold climbed to around $1,900 by 2011.
When it didn't
After its 1980 peak, gold spent about two decades falling and then drifting, at times below $300, even though inflation never stopped. Investors who bought at the top waited many years to break even, and longer still in inflation-adjusted terms. Gold can also lag in shorter bursts of inflation when interest rates are rising.
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Request the Free KitWhy real interest rates matter
Gold pays no interest. When savings accounts and bonds pay well above inflation, holding gold has a real cost, and demand tends to soften. When interest rates sit below inflation, cash and bonds lose real value and gold looks more attractive. That's why gold can rise in some low-inflation periods and stall in some high-inflation ones.
Other inflation hedges
- TIPS: US Treasury bonds whose principal adjusts with inflation.
- Stocks: companies can often raise prices over time, though stocks can struggle when inflation first spikes.
- Real estate and commodities: tied to real assets, with their own risks.
Many investors use a mix rather than relying on one. See gold vs stocks.
The takeaway
Gold is better thought of as protection against a loss of confidence in money than as a precise inflation hedge. Held for the long term, as part of a diversified plan, it has done that job well. Bought in a panic at a peak, it can take years to pay off. Check the latest market update for where prices stand now.