Q: Is gold no longer an inflation hedge?
A: Gold certainly can be an inflation hedge, and it has worked in the past. Obviously, one of the reasons gold has been weak of late is that people are becoming less concerned about inflation. Now, I don’t think you want to have a huge allocation to gold unless you’re really, really concerned about inflation, and I’m not.
Market Realist – The graph above compares gold (GLD)(IAU) prices with inflation rates over the last eight years. Gold prices tend to increase along with inflation rates. Since gold is a store of value, investors would put their money in gold rather than keeping cash idle as inflation increases, since it would erode their wealth. So gold, along with other precious metals like silver (SLV), has been a good hedge against inflation—and they still are.
Although equities (SPY)(IVV) also do provide a hedge against increasing inflation rates, other market dynamics—like economic growth rates or corporate earnings—affect stock prices. So equities may not be a perfect hedge. Gold, on the other hand, moves up with inflation rates invariably, making it a better hedge against inflation.
Please read the next part of this series to learn one of the reasons why you should hold gold in your portfolio—at least in small amounts.