Is Gold a Good Hedge Against Inflation?

gold and silver round coins
by Advice Chaser
by Advice Chaser

Paper money is more convenient to carry around in your pocket than gold coins. But some say that when society made the switch to paper money—fiat currency, as it’s called—money became less reliable and secure. Since governments can simply print more bills, the value of a dollar isn’t constant.

At a time like this, when the value of the dollar is declining and prices increase, some recommend collecting gold as an alternative to keeping your money in bills or the bank. By this reasoning, gold, which has a relatively stable value, will protect you from losing the value of your money to inflation.

gold and silver round coins

How and Why People Invest in Gold

Gold has the weight of tradition behind it. It once was a standard currency over much of the world. There’s a limited amount of gold in the world, and the amount in circulation increases only slowly, as people mine it. Its real value does fluctuate, but less than many other commodities.

Its value doesn’t correlate strongly—or much at all—with the rest of the market, so some investors like to keep a small percentage of their portfolio in gold in case of a market-wide crash. For instance, gold kept its value during the COVID-19 downturn.

The most obvious way to buy gold is to simply buy physical coins or bars. However, this can be less secure, as gold can be lost in a robbery or you might forget where you put it. For a safer and less hands-on approach, you can buy stocks in gold mining companies, gold mutual funds, or gold ETFs. More advanced investors can consider futures or options in gold.

Why It’s Not the Best Hedge

Despite the hype from its boosters, gold isn’t the best hedge against inflation. Why not? Well, inflation tends to happen at a time the market is growing. That means there are usually many other hedges you can invest in, and these will do better than something that stays relatively stable. Your goal as an investor during a time of inflation is to continue growing your nest egg by outperforming inflation. Gold won’t usually do that for you.

In addition, its value is not entirely stable. While it averages out about the same on long time scales, its value can fluctuate over the short term. At times, its value falls relative to inflation. During the current inflationary market, the price of gold has fluctuated quite a bit. Depending on when you bought or sold it, you might have very different results.

Last of all, gold is not very liquid. If you have a big gold bar in your closet, you still have to find someone to buy it before you can use your money. And if the gold price isn’t good at the time you want to sell, you may not get much value for your investment. Also, gold coins, as collectibles, are subject to a higher capital gains tax when you sell them.

Alternatives to Investing in Gold

During a time of inflation, the stock market often continues to do well. Over long timescales, the S&P 500 averages 8-15% returns. As long as you don’t panic and sell during a downturn, your money is safe and will usually outperform inflation in a diversified portfolio of stocks, funds, and bonds.

If you need more guaranteed protection against inflation, Treasury inflation-protected bonds may be the option for you. These bonds automatically adjust in price to keep pace with inflation. This way, your investment is guaranteed not to lose value, and you will still earn some interest.

Gold’s claim to fame is that it has value no matter what the market is doing. But that is also true of anything people use or need. Commodities like wheat, energy, or steel will continue to be useful at all times. When you invest in these, whether through shares in an individual company, ETFs, or mutual funds, you know you hold something people will continue to want. While commodity prices can be volatile, they can help diversify your portfolio. Another investment with reliable value is real estate, whether you buy properties directly or invest in real estate funds.

Talk to Your Advisor About Inflation

If inflation has gotten you concerned, it’s time to make an appointment with your financial advisor. They can help you make sure your portfolio is inflation-ready and point out any improvements you can make. When you’re investing wisely, inflation can’t do much to hurt you. To meet an advisor who knows how to weather any kind of market, contact us today.

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