Key Takeaways
- The link between gold and inflation comes down to purchasing power. The price of goods and services has steadily increased over time, but fiat currency hasn’t kept pace.
- When comparing the history of gold vs. inflation, gold’s purchasing power has remained incredibly stable and consistent over the years, even during tumultuous inflationary periods.
- Gold performs exceptionally well during periods of economic downturns, often rising in value when fiat and other investment vehicles falter.
- Over the past ten years, the USD’s total rate of inflation was 33.45%. Gold’s purchasing power has tripled.
There’s an old saying in the financial world: “One ounce of gold will always buy a nice suit.” This simple statement perfectly captures why gold is a hedge against inflation.
The historical performance of gold during inflation periods has been remarkably stable. Regardless of stormy economic weather, gold has maintained its purchasing power for centuries. The same cannot be said about fiat currency.
It’s no secret that the cost of goods and services has skyrocketed over the past ten years, let alone the past century. Unsurprisingly, there’s a strong correlation between investing in gold and inflation mitigation.
Savvy investors trust gold because it has proven itself time and time again. The numbers speak for themselves. Those who have invested in gold have retained their wealth; those who trusted fiat have seen their net worth plummet significantly.
Read on to learn why gold is a strong hedge against inflation and how you can use it to secure your long-term financial future.
What Is Inflation?
Before comparing the performance of gold vs. inflation, it’s important to understand the fundamentals.
“Inflation” is a term that refers to the rising costs of goods and services. When prices grow (inflate), but your income and the value of your assets don’t grow at the same pace, you lose purchasing power.
To visualize inflation, think about how far you could stretch a dollar ten years ago compared to the present day. Ten years ago, you could easily find a fast-food burger for a buck. Today, you’re lucky to find a value menu item for under $3. That’s inflation.
Of course, inflation goes far beyond fast food! People don’t buy gold as a hedge against inflation just because their favorite combo got a price hike. Inflation occurs when the overall prices of goods and services rise across the entire economy due to the devaluation of the dollar.
What Is a Hedge?
The term “hedge” refers to a financial shield that protects your purchasing power from economic downturns like inflation, as well as recessions, banking crises, declining interest rates, and geopolitical instability.
The connection between gold and inflation is based on gold’s ability to not only weather economic storms but also perform incredibly well during them.
Savvy investors use gold as a hedge against inflation because it tends to move opposite to traditional investment vehicles. For example, when the S&P 500 is red, gold is typically green. When the dollar’s purchasing power declines, gold holds steady.
The reason why gold performs so well comes down to the most basic economic concept: supply and demand. When the economy gets dicey, prudent investors scramble to hedge their bets with gold. As demand rises, the available gold supply decreases, causing its value to rise.
Why Gold Holds Its Value Over Time
In order to analyze the movements of gold vs. inflation and make sound decisions, you need to recognize why gold has historically performed so well, even when fiat and other traditional investments falter.
- Gold Is Real Money: Gold has true, intrinsic value and all of the qualities of an ideal currency. Investors use gold as a hedge against inflation because it’s scarce, durable, fungible, divisible, and universally accepted.
- People Trust Gold: It’s a bit of a chicken-and-egg scenario. People trust gold because gold has proven to be trustworthy.
- Gold is in High Demand: From gold coin and jewelry collectors to large-scale industrial manufacturers, gold’s unique physical attributes make it coveted around the world.
- Gold Is Easy to Buy and Sell: Gold is a highly liquid asset that can easily be converted into cash at any given moment.
The Numbers Don’t Lie
To visualize the link between the performance of gold and inflation periods, let’s look at the ten-year period between January 1, 2016, and January 1, 2026.
Here’s a historical example of why gold is a hedge against inflation:
- The total rate of inflation of the U.S. dollar was 33.45%.
- On average, a product that cost $100 in 2016 would cost $133.45 in 2026.
- $100 worth of gold purchased in 2016 would be worth approximately $400 in 2026.
Simply put, gold didn’t merely retain its purchasing power; its real-world buying power tripled!
Protect Your Financial Future With Gold
Now that you understand the performance of gold vs. inflation, it should be much easier to grasp why and how gold retains purchasing power over time. Gold has proven to be a trustworthy store of value, while fiat’s ability to purchase goods and services has continually declined.
If you’re ready to start reaping the benefits of using gold as a hedge against inflation, contact us now for a free consultation with a qualified Citadel Gold precious metals specialist who will answer all of your questions about gold and inflation.
Whether you’re interested in buying government-issued gold coins and owning them privately or using a gold IRA rollover for inflation protection leading up to your retirement, we’ll provide expert assistance every step of the way. Call 800-605-5597 to get started.
