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Should You Own Gold to Hedge Inflation?

Inflation is at its highest level in four decades, and there has been increasing interest in gold or precious metals as an investment. The highly volatile Bitcoin has been described as a modern “gold-equivalent” because its supply, like gold, is limited. However, most investors poorly understand Bitcoin, which is frankly too risky. Also,  Bitcoin dropped 50% in 2022, and not the inflation hedge investors thought it would be.  Gold is well understood and is much less risky.  However, should you own gold to hedge against inflation?


When Would Gold be a Good Investment?

The belief that gold is an excellent hedge against inflation comes from the theory that when prices rise, so does the price of gold.  However, a careful study of the correlation between inflation and gold shows that gold is not a quality inflation hedge.  Historically, gold has been about four times the Consumer Price Index, so gold is currently significantly overvalued compared to inflation.  The article by the Federal Reserve Bank of Chicago shows what the price of gold has done compared to the consumer price index.


Gold Holds Up in a Recession

Gold has been recommended as a stable value asset when stocks significantly increase. Indeed, the price of gold and the stock market’s value has little correlation over long periods. In the recessions of 2000-2002 and 2008-2009, gold did remain stable as the price of stocks fell significantly. However, the price of gold has recently been more correlated with the rising stock market over the last year.  Throughout both of those periods, equities have flourished much more than gold.

When does Gold Shine?

Gold does best when the US dollar loses value compared to foreign currencies. Therefore, a weak dollar would benefit holders of gold. Rising inflation would weaken the dollar, which could help gold.  But, rising interest rates tend to suppress the price of gold, and interest rates tend to increase with inflation.  Currently, the US dollar is gaining in value across the world.  Also, the Federal Reserve has finally made its mission to bump interest rates and not be beholden to keeping the stock market afloat.


Should you own Gold?

There is a significant reason not to hold gold in an investment portfolio.  Unlike bond interest or stock dividends, it costs to store and does not pay an income. A better idea would be to purchase the stocks of gold-mining companies that pay dividends. Barrick Mining and Newmont Mining are two such gold mining stocks that pay dividends.  As we do not recommend having gold or gold mining stocks in a portfolio, an allocation to gold or other precious metals under 3% would be justifiable.


About The Author

Jordan Benold, CFP® provides fee-only financial planning and investment management services in Frisco, TX.  Benold Financial Planning serves clients as a fiduciary and never earns a commission or sells a product.  Jordan has over three years of experience as a financial advisor in Frisco.

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