Can Investing in gold be an effective hedge against inflation?

Many people have been thinking about investing in gold over the past several years. There are many good reasons. The economy has been in decline, the stock markets continue to be volatile, and Congress has yet to reduce government spending. All this chaos makes it easy to forget the importance of gold for retirement planning. Let’s be real, you likely came to this page because you were told that gold investing can help you have more security and long-term success than other types of investments. Although there are many things to learn about gold investing, it is impossible to do so in one article. Let’s instead focus on the most important: gold prices and inflation. On gold etf in ira you can learn more.

There are many reasons why investors choose to include gold within their portfolios. The most important is the belief that investing in gold will protect them against inflation. Let’s face it, inflation and gold do not have a perfect correlation. The changes in the gold price do not always match the changes that occur in the Consumer Price Index, which is the official measure of inflation in America. In reality, gold can’t keep pace with inflation for periods of time. This means that you lose purchasing power if you own this asset. There are also periods when gold prices rise significantly faster than the CPI. In fact, gold prices rose by approximately 350% between January 2001 & January 2013, while the Consumer Price Index increased by just 31%.

To better understand the relationship, let’s examine the data over a longer time frame. Below is a chart showing the relationship. The yellow line shows changes to average gold prices while the red line shows changes to the average CPI. You can see that they are not perfectly correlated. The most recent example comes from the 2001 period, when inflation and gold begin to move almost opposite ways.

What is the reason for this? There are many reasons for this. First, CPI calculation have a tendency for change over time. These calculations are regularly changed by the federal government because even small changes can make a significant difference in Social Security benefits or other government programs. You are purchasing a commodity. Investor psychology can also affect the price of gold. In order to preserve wealth, gold was a preferred asset for many who sought it out when the economies were in trouble. As investors anticipate the impending crisis, the surge in gold investment can sometimes drive the prices up faster than inflation. This is exactly what has happened over the past decade.