Investors today say a lot that gold is no longer suited to tackle inflation. Let us discuss the meaning and truth behind this statement. Before we begin, it is crucial to understand these two terms, inflation and hedge asset. Inflation in Lehman’s language is the rate of increase in prices of commodities over a while. Inflation results in money-losing its value and a reduction in the purchasing power of the people.
Hedge assets refer to an investment used to mitigate adverse conditions like inflation, hyperinflation, dollar collapse, stock market crash, etc. It is an investment that helps in tackling inflation. Gold Investment has always been considered a great asset to hedge against inflation. It is because gold has always kept its value in the long term.
But, in recent times, based on gold’s performance, investors are doubtful and believe that gold is no more an investment that can hedge against inflation.
Gold’s performance in recent years:
Considering the last 50 years, the correlation between gold and inflation has been around 0.16, based on a report by Nancy Tengler of Laffer Tengler Investments. This data shows a very low correlation indicating that gold may not be the right option to tackle inflation.
On one hand, the Consumer Price Index (CPI) has risen to 140% between 1980 to 2000. While on the other hand, gold has lost approximately 40% of its value in the same period. Although, during a certain period of high inflation, gold has sometimes outperformed and sometimes underperformed. It indicates that gold might have less or no correlation with inflation.
In the Covid era, we all have observed how gold prices had gone up drastically. Gold prices increased by 21.4% in the initial days of the covid. But, after a few months, gold prices again dropped even though the CPI remained higher. It Indicates that investing in gold will not provide security from inflation.
Considering the past two year’s performance of gold, in 2021, the annual percentage change in the price of gold was -3.51%. And in 2022, that is this year, it is positive but only has increased by 0.74%.
All the above data and situation proves that gold is a volatile asset. It also has less or no correlation with inflation. It proves that gold is actually no more a hedge against inflation. However, gold still is a good investment option. It is just that gold is not a good option for tackling inflation. Better options for hedging against inflation are available.
The solution to tackling Effect of Inflation:
Diversifying your portfolio and investing in assets like stocks, and real estate helps in tackling inflation better. Depending only on gold or any one asset for the matter is not a good choice. So, diversify and do a proper asset allocation. Invest in assets like real estate and stocks to hedge against inflation.
To conclude, gold is not a bad investment overall. But it is not suited anymore to be a hedge asset to tackle inflation.