Facing inflation is an important topic that a lot of people have been thinking about in the last few years, especially with the rise of inflation rates in many countries around the world. Many people are considering whether putting their wealth in gold is the best hedge against inflation or investing it in other options that could give a better yield.

After all, gold stood as a store of value for many millenniums across history, and has real-world value on and off its own, which makes it stand out compared to any fiat currency.But how exactly can gold serve as an inflation hedge compared to some other possible assets? Let’s find that out in this article.

What is inflation

What is inflation?.jpg

In general, inflation is defined as the increase that occurs on the prices of goods and services in any country around the world.

An annual inflation rate of 10% for example means that the item that you could have bought for $100 in the last year now requires $110 so that you buy it, reducing the value of the currency in your hold and hence reducing your wealth by turn.

Inflation generally happens due to economic issues, geopolitical conflicts or other troubles that could be affecting the currency of the said country. Sometimes, inflation happens not because of any of the said issues, but simply because of supply and demand on given goods/services or because of monetary policies affecting a specific currency.

In order to face inflation, regular people need to invest their wealth in an inflation hedge that does not suffer from the same troubles that their local currency is suffering from.

The economy of Turkiye, for example, is suffering an inflation rate of 61%; one of the highest in the world. This means the purchasing power of the Turkish Lira is decreasing as time passes.
These inflation hedges may include gold, real estate, USD, stocks, cryptocurrencies and some other goods that are generally sought in hardship times of inflation.

How does inflation affect Gold prices?

In general, gold prices increase as well when inflation rates increase, although not necessarily.
This is because as the value of fiat currencies gets lower, the value of a real-world commodity like gold increases. Either because central banks and the public demand for buying gold increases as well, or simply because the price difference to buy gold under inflation becomes larger, pushing gold prices even higher.

This is not a necessity, of course, because if the global prices of gold were decreasing at the same time when inflation is occurring, then gold may not be able to catch up with it, and in such cases, it could be a less desirable inflation hedge compared to other options.

It is tricky when one should use gold as an inflation hedge or seek better alternatives. After all, this is an investment that could either save the value of your wealth or even increase it, or make you suffer losses due to an unwise strategy.

Was gold a good inflation hedge historically?

Using gold as an inflation hedge depends on many factors, including those that are driving the inflation rate up in the first place.
The following 5-years chart shows the price of gold compared to CPI (Consumer Price Index) in the US; an indicator of inflation that happens in the prices of goods and services in any country:

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As you can see from the period between the middle of 2021 to the end of 2022, gold prices did not increase at an equal rate compared to the increase in CPI. This confirms what we said earlier that gold is also affected by demand and supply rules, interest rates and geopolitics, and not just the inflation rate itself.

However, you can see from any other period in the chart how gold prices always tend to increase after all. For example, as you can see from the chart, the price of gold increased by around 66% between 2020 and 2024, outstripping inflation by a magnitude and making it an outstanding hedge against it.

Gold vs Other commodities in the face of inflation

We are going to compare gold to other options in terms of how good they could possibly be as an inflation hedge.

Gold vs USD as an inflation hedge

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If you are putting your wealth in a non-USD local currency, then the question of gold vs USD as an inflation hedge may come down to interest rates and the economic cycle of the US economy. USD may still be a better option to put your wealth in compared to your local currency if it is suffering from high inflation, but it is tricky when you time your investment.

However, using USD as an inflation hedge will at most save your wealth at its current level or may increase it a little bit, but it will never increase it. This is because historically, we know that the value of USD is tending to decrease year after year.

The purchasing power of 1 USD in the year 2000 was 50% more than it is today, for example.
Compare that to gold which just hit a new all-time-high of nearly $2600 per ounce.
One of the key aspects of gold is that its value remains stable over time, preserving purchasing power, unlike fiat currencies that lose value as they depreciate. As a result, gold serves as a reliable store of wealth, with demand increasing over time.

Gold vs Local Currencies as an inflation hedge

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Keeping your money in your local currency that is suffering from inflation could be one of the worst decisions that you take.

Your wealth would be losing value month after month, and you are not doing anything about it.
In the case of Turkiye which we mentioned earlier, the inflation rate has reached %61, which means the value of the Turkish Lira - and thus your assets in that currency - is losing a significant portion of its value rapidly.

Gold, on the other hand, at least shields your wealth from such losses by making it flow with the value of the material itself, away from the problems of your local economy.

Gold vs Cryptocurrencies as an inflation hedge

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Cryptocurrencies have been on the rise since the last decade. Coins like Bitcoin, Ethereum, and thousands of others have seen a tremendous flow of capital from all types of investors around the world.

While the possibility for profit with cryptocurrencies is high and the revenue could be huge, so are the risks associated with your investment in cryptocurrencies. For example, the price of Bitcoin fell from $67,000 in November 2021 to an average of $25,000 afterward, and did not reach the same level again until March 2024. That’s around 3 years of struggling with insanely low wealth values.

Gold, on the other hand, never falls down to such levels. In the last 10 years at least, gold has never lost more than ~12% of its value at any given two points in time.

The risks associated with cryptocurrencies vary as well from one coin to the other, and some coins may lose their value forever since they are not backed by any real-world commodity.
But gold does not suffer from this, because it has value in and off itself.

Gold vs Stocks as an inflation hedge

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Stocks are yet another option that is sometimes sought in times of high inflation. Just like many other options, not all stocks are the same, the performance of a given stock is quite different from the other.

However, keep in mind that you need to pay a lot of taxes - depending on your country - on your realized gains from selling your stocks with profit, which means that you can not simply keep your wealth in stocks and get their value at any time you want while they remain intact. Instead, the government may take a portion depending on gains you made during that period of time.

While some countries may impose such taxes on buying and selling gold as well, they remain very much lower in the case of gold and sometimes they may not exist. You could buy physical gold if you wish and keep it for yourself away from the eyes of the world.

Stocks also suffer from geopolitics, daily news, company performance and other factors. Making them very unstable and unpredictable with a high margin for losses and profits.
In the case of gold vs stocks as an inflation hedge, gold scores a strong point in terms of stability, predictability and ownership.

Short term vs Long Term Gold Investment Strategy

Gold can be traded either daily, weekly, monthly or during any period of time like any other means of investment.
However, investing in gold in the short term is tricky and could increase the risk associated with your wealth. For example, here’s the price of gold in the last 10 years:

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If you were to buy gold in the late months of 2016 just before the price goes down, then you are not going to make any profit for the next three years.

However, if you are thinking of a long-term strategy, then the price difference of gold between 2016 and 2020 is around 40% more. So during these years, you did not just keep the value of your wealth as it was, but you have also increased it by a good margin.

Investing in gold for long-term is generally what pays off well compared to other strategies, and has the lowest chances of loss and highest chances of success and profits.
It is the key to save your wealth and build upon it for the future.

Conclusion

We have seen what are some possible inflation hedges in this article and why gold could be one the best choices for this. Remember that when you are buying gold then you are not just buying an investment instrument, but a physical material that always keeps its value safe and secure no matter the hardships outside.

People are starting to buy digital gold in order to ease the process of buying and selling it. At Phi Wallet we provide a seamless and convenient way to buy gold, enabling our users to enjoy the benefits of physical gold without any hassle.
If you are hesitant to start saving your wealth against inflation with gold, then now could perhaps be the best option.

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