uploads///Gold is a good hedge against inflation

Gold Is A Good Hedge Against Inflation

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Feb. 12 2015, Updated 3:06 p.m. ET

So what does this mean for investors? It’s important to keep in mind that despite gold’s expense and the current cheap valuations of gold mining company stocks, gold miners are not a good substitute for physical gold from an asset allocation perspective.

First, over the long term, gold has been a much better inflation hedge.

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Market Realist – Gold is a good hedge against inflation.

The graph above compares gold (GLD)(IAU) prices with inflation rates over the last ten years. We used the year-over-year, or YoY, change in the CPI (consumer price index) to track inflation. In the last three periods of rising inflation—August 2007–August 2008, July 2009–May 2010, and November 2010–September 2011—gold prices also rose. This means that gold is a good hedge against inflation. This is because gold stores value.

Historically, there has been some benefit to holding small amounts of gold in a portfolio. As a physical asset and a way to store value, gold tends to behave differently than equities (SPY)(IVV). It helps to diversify a portfolio. We’ll explain this in more detail in the next part of this series.

Equities aren’t as good a hedge against inflation as gold. As a result, gold is a better hedge against gold miners (GDX). More importantly, major gold miners started hedging production in recent years. They reduced their correlation with gold.

However, inflation remains low. The headline CPI came in at 0.8% in December. If the oil (USO) price remains low, inflation could also remain low for a few more months. Oil is an overhead cost for most industries in one way or the other. However, when inflation increases, gold could outperform the gold miners—especially if rates remain low. This means real rates would be likely be close to zero or negative.

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