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Investing in Gold During Inflation | Everything You Need To Know

Data gathered by the World Gold Council shows that the global demand for gold is always highest during times of economic uncertainty.

In particular, inflation is one of the greatest fears of any investor with a large chunk of their portfolio held under paper asset classes.

The inflation expectations being predicted by many economists around the world have led to the same questions being asked regarding investing in gold during inflation.

Precious metals, in general, have been receiving a lot of interest as people begin to lose faith in the ability of fiat currencies to weather the coming storms.

At the moment, a complete global economic meltdown is still a bit farfetched, but judging by the frantic adjustments of interest rates by various central banks, a solid investment strategy that includes precious metals is needed.

Physical Gold Is an Inflation Hedge. Why?

Investing in Gold During Inflation

The fact that gold and other precious metals act as a hedge against inflation is well known to gold investors.

However, what most investors do not know is why the past performance of gold asset classes improved during the same period that inflation rises.

Inflation is the increase of prices of goods and services accompanied by a reduction in the purchasing power of fiat currencies, in this case, the US dollar. This has been the story since 2021 when consumer prices have risen by 9.1%, the highest in 40 years.

In response, the Federal Reserve bank has increased interest rates to 3.25%, which is high but still not enough to keep up with the runaway inflation.

While some economists are saying it is still too early to panic, those who have a lot of investments in the stock market are becoming very nervous about the inflation rate.

As the buying power of the dollar declines, inflation protection is the new buzzword on the streets and investors have been keeping one eye locked on the gold price.

The past performance of precious metal asset classes seems to support this resurgent interest in gold and similar commodities.

In 1970, for example, during a decade-long period of high inflation, the value of gold rose from $35 per share to as high as $850 per share.

Based on these gold prices, and similar trends over the past century, gold is viewed as a worthy inflation hedge. As a result of this inflation data, any financial planning for 2023 has to include ways to invest in gold.

Correlation Between Inflation and the Price of Gold

Let us look closely at the inflation data that supports this “inflation hedge” theory based on the correlation between inflation and gold prices.

Between 1974 and 2008, the US experienced a total of eight years of rising inflation in which the rate was at least 5%. Coincidentally, this same period saw the gold price increase by a year-on-year average of 14.9%.

However, one interesting fact is that moderate rising inflation rates do not have the same effect on gold prices. This would suggest that the increase in the price of gold is due to the bleak market expectations shown by consumers when inflation rates become too high for comfort.

The mechanizations of the Federal Reserve bank in its attempts to arrest rampant inflation may also inadvertently affect the price of gold. This is why whenever the interest rates are adjusted there is a ripple effect felt by gold investors.

Relationship Between Gold Prices and the US Consumer Price Index (CPI)

Many investors agree that there is no real correlation between the price of gold and the Consumer Price Index (CPI). Only 16% of the changes in gold prices since 1971 may have some relationship with the US CPI.

Many times, and as recently as 2021, gold prices have risen and fallen even when the CPI has remained steady. This would suggest that if you are looking for market data that will give you a hint about the gold price, you should look elsewhere other than the CPI data.

Who Should Buy Gold During Times of Inflation

Historically, buying gold has been considered an “old man’s game” but that has been changing over the years. Even young gold investors are taking a keen interest in gold and other precious metals.

Anyone who is concerned by the state of the economy and is looking for a hedge against inflation should consider investing in gold stocks. The younger the investors are the better it is because gold returns take years to reach a point where they bring real value to an investor.

It is never too late or too early to consider having a significant portion of your investment portfolio dedicated to gold and other precious metals.

Good Times to Harness the Purchasing Power of Gold

Generally, when the economy and the stock market go south, it’s a good time to have some of your money invested in gold.

However, you don’t have to wait for a financial crisis to trigger your interest in gold investments. Even without its use as a hedge against inflation, gold returns are still worthy of consideration as investment options.

There is no particularly good time to invest in gold. Most financial planners will tell you that the right time to buy gold is now!

Best Ways To Invest in Gold in 2023

There is more than one way to invest in gold, which means you are free to choose whichever investment option you want from the options below:

Owning Physical Gold

The simplest way to invest in gold is to approach a gold dealer and buy your gold at the day’s spot price. This requires some research first before going out in search of gold.

Two things you need to be clear on are the current prices of gold on the commodities market and what physical gold looks like.

There are, however, many reputable gold dealers out there that will sell you real gold at a fair price without trying to scam you.

Buying Gold Stocks, Bonds, and Exchange Traded Funds

If you are not interested in buying physical gold and have to struggle to find a place to keep it safely, there are many ways to trade gold assets on the money market.

Simply open a brokerage account and you will have the option to trade gold stocks, bonds, and gold ETFs.

With this option, you will still have the benefit of getting a hedge against inflation without the accompanying need to transport and store your gold.

Investing in a Gold Mining Company

If you can find a promising gold mining company that is issuing an IPO, you can get on board early and buy a sizeable amount of shares that will become very valuable as the organization grows. With the current high demand for gold, the future looks very good for mining companies.

Opening a Precious Metal IRA

One of the best ways to invest in gold is through a gold IRA. If you are planning on leaving your funds to stand for many years until you retire, opening a tax-advantaged retirement account is the right choice.  Our updated gold IRA guide has the latest recommended companies we have vetted.

With a gold IRA, you get the best of both worlds in that you are guaranteed to have a hedge against inflation while at the same time enjoying the many tax benefits of having benefits that come with an IRA.

What most people consider to be a drawback of gold IRAs (the fact that you cannot keep your gold) could be an advantage to investors who do not want the hassle of looking for transportation and storage for their gold.

Do Any Other Asset Classes Do Well During Inflation?

There are a couple of other asset classes that have proven to be good investment choices during inflation periods. Although certainly not as inflation-resistant as buying gold, investing in the following options may be a wise decision:

  • Treasury bonds (or government bonds) have the advantage of being backed by the full might of the US treasury department. That means while other asset classes may suffer due to inflation, it will be a while before the government allows the impact to be felt by investors holding government bonds

  • Exchange-traded funds (ETFs) are a combination of contracts and cash, which offer investors a lot more security in times of economic turmoil. Depending on the size of your investment and your risk tolerance, ETFs have the potential to provide huge returns for investors who make the right decisions early on

Final Word

If you have not yet started to consider investing in gold in 2023, you must not have been paying a lot of attention to the signs that are out there. The economy is in a bad state ever since coming out of the recent global pandemic.

Right now, is the best time to look for a hedge against inflation, and in that regard, gold is your best option.

With so many ways to invest in gold, you can easily find one that suits you best and is in line with your budget. Pick one today and invest in gold for your financial future.