How to Hedge Against Inflation With Gold

With rising inflation being a new corrosive force gradually eating away at the nominal value of savings and investments around the world, and perhaps being the single biggest threat for millions of people who have been steered in the direction of “conservative assets,” gold has found its way back on the radar for anyone looking to protect themselves from emerging price pressures. However, according to a 2018 survey conducted by the Aegon Retirement Readiness Survey, nearly 35% of people in America don’t understand basic financial concepts such as inflation.

Hedging Against Inflation With Gold or Silver Investments

So, how can you use gold or silver to your advantage for protection against purchasing power risk? In this article, we’ll dissect what it means to hedge against inflation, how gold, specifically, can be used as an inflation hedge, and how it will retain value over time.

What Does It Mean to Hedge Against Inflation?

Graph next to a 1 dollar bill. Red trend line indicates the stock market recession period

In short, an inflation hedge is an investment that can be considered as a “reliable measure of protection against decreasing purchasing power of a currency that results from the loss of its value due to rising prices (inflation).” Hedging against inflation typically consists of investing in an asset that’s expected to maintain or increase value over a specified period of time, but it can also involve taking a higher position in assets with hopes that it may decrease in value less rapidly than the value of the currency.

How Gold Is Used as an Inflation Hedge

Hedging against inflation is the traditional motive behind investing in gold, but its role is perhaps the most debated issue in the financial press. Gold is widely considered an inflationary hedge because its price in U.S. dollars is variable. For example, if the U.S. dollar loses value from inflation, gold tends to become more expensive, which means the owner of gold is protected against a falling dollar because the cost of every ounce of gold in dollars will rise as a result of inflation rising and eroding the value of the dollar.

How Does Gold Retain Value Over Time?

Close-up Of A Businessperson's Hand Balancing Stacked Coins On Wooden Seesaw With Finger Over Desk

Gold has a long history as the first form of money before becoming the base for the gold standard, which inevitably set the value for all money. For this reason, gold is considered a safe haven as a source of capital that will always have value.

Day-to-day and month-to-month, the price of gold can fluctuate, but in the long term, no matter what you compare it to, gold holds its value, which is why gold makes for such an exemplary hedge against political uncertainty, economic challenges, financial crises, etc. For example, the price of gold more than doubled from 2002-2007 when the price went from $347.20 to $833.75 per ounce when the dollar’s value fell 40% during that period. For 15 days following the stock market crash, gold prices increased dramatically again as prices went from $869.75 in 2008 to $1,895 in 2011.

With the United States increasing its ballooning debt, leaving a major pension problem unsolved, and starting trade wars with the world’s second largest economy and most of the world’s other top economies in economic stagnation, it’s nearly impossible for an expert to predict how everything will play out moving forward. However, one thing is for sure and that is that gold has been around for thousands of years and has a great track record of maintaining value.

You can buy an ounce of gold today at a reasonable cost compared to current inflation risks, which makes it even more plausible and sensible as insurance for yourself and your family. Committing a portion of your portfolio to gold bullion can be one of the best investment decisions you ever made.

Secondarily, silver has a trailing relationship with gold. Typically, as gold increases in cost, so does silver. With silver being in historic lows relative to the cost of gold, silver may be a better inflation hedge than gold right now. Additionally, West Hills Capital offers an exclusive income program for silver coins that participate in the firm’s Silver Deposit Account program. Check this out, too.

Call (800) 867-6768 to speak with one of our metals strategists today.