Is Gold Inflation Proof?

Posted - November 21, 2023
is gold inflation proof

Is gold inflation proof, or is this just a sales tactic? 

Financial advisors have touted the benefits of investing in gold for decades. Even the biggest names in the world of personal finance have called gold a ‘safe haven’ asset worth adding to nearly any portfolio. What is a safe haven asset? Safe haven assets are considered reliable investments because they don’t tend to lose much value during bear markets. 

The evolving modern economy has changed the way advisors talk about personal finance and investing. It’s worth asking: is gold still an ideal safe haven asset? To approach this question, we’ll need to consider one of gold’s main benefits. The reason gold has been called such a reliable safe haven asset is because of the way this asset’s value responds to inflation. 

So is gold inflation proof? We’re taking a look at this important question in today’s Bullion Academy guide. By the end of this article, you should have a better understanding of how gold functions as a barrier to shield your assets from the impact of inflation. 

Understanding Inflation 

Just about every consumer is familiar with the concept of inflation. In fact, many of us even have a basic understanding of what inflation is. In order to answer, “is gold inflation proof,” we’ll need to take a closer look at what inflation actually is

Politicians and financial analysts often use inflation to describe the strength of a currency. This isn’t entirely wrong. Inflation tells us how much a currency is worth, relative to the goods and services people spend the currency on. But there’s more to the story. Inflation itself just refers to a change in the price of goods and services. When goods and services become more expensive, this decreases the relative buying power of a fiat currency. 

The Federal Reserve, the U.S. authority responsible for maintaining its currency, uses several different tools to respond to inflation. We’ll get into those later on in this guide. For now, what you need to know is that inflation primarily affects fiat (paper) currencies like the United States Dollar. But why is gold inflation proof? 

How does Inflation Affect Gold Prices? 

Given that inflation mostly influences the buying power and value of traditional fiat currencies,it’s easy to assume that gold would be safe when inflation rates rise. This is generally true. Is gold inflation proof? Not entirely; gold’s value can hypothetically decrease during inflationary periods. But in order for this to happen, the value of the USD would have to drop drastically enough to prevent market movers from making large gold purchases. 

This hasn’t happened yet. For the most part, inflation is actually a good thing for the value of gold. Part of the reason for this is the self-replicating cycle created by investor demand. When inflation is high, investors turn to safe haven assets like gold. And when this happens, that represents an increase in overall demand – driving prices for the asset even higher. 

As you can see, it’s a bit more complicated to understand the relationship between gold and inflation than some investors might assume. Is gold inflation proof in every conceivable scenario? Definitely not. If gold was guaranteed to be a hedge against inflation, then investing would be as simple as responding to inflation rates by buying or selling your gold. 

Still, historical price trends tell an important story about how gold’s prices relate to inflation. Gold isn’t just a safe bet for investors worried about the declining value of their country’s currency – it might be the most profitable bet you can make. 

Non-Correlated Assets Explained

Is gold inflation proof? To understand gold’s role as an inflation hedge, we need to learn a bit more about yet another type of investment. As a safe haven asset, gold falls into a larger category of investment classes known as non-correlated assets. Non-correlated assets aren’t driven by traditional economic indicators. When we’re talking about traditional indicators, think of things like unemployment, stock prices, and inflation. 

Is Gold Inflation Proof?
2023 1 oz South African Gold Krugerrand

With traditional stocks, bonds, and other assets, a downturn in the general economy means bad things for the value of most portfolios. After all, investments in companies can’t possibly do well when the rest of the economy enters a recession, right? 

Gold is a different story. Gold isn’t the only non-correlated asset, either. Generally, we consider any asset that doesn’t positively correlate with traditional market factors to be non-correlated. Gold is tricky because it sometimes has an inverse relationship with these same indicators. In other words, the things that are good for most stocks and bonds might be bad for gold – and vice versa. 

So is gold inflation proof? Because it is a non-correlated asset, gold’s price might either stay the same or increase during periods of intense inflation. 

Tracking Gold Prices

We don’t just want you to take our word for it. If you’re asking, “is gold inflation proof,” the first thing you should do is take a look at historical gold price charts. These charts can provide valuable insights into how gold responds to economic changes and stimuli. To make the most out of your research, we recommend comparing gold price charts with other charts, such as a chart that tracks inflation rates across multiple years. 

Gold Versus Traditional Assets

Is gold inflation proof, and what makes it better as a hedge than other assets? Like we spent some time explaining earlier, gold is quite a bit different than traditional assets. While it’s hard to draw a line between “traditional” investments and non-traditional ones, we tend to consider stocks, bonds, and other basic fiat investments to be part of the traditional class. 

Compared to these options, gold is in a unique spot. 

When you invest in stocks from popular companies, you’re betting on their success. A successful company is hard to find when the traditional economy enters a bear market, because it becomes harder for companies to generate the profit they need to appease investors. This becomes a cycle, and people pulling their money out because of poor investment performance further drives the stock’s value down. 

1 oz Gold Bar In Assay Card
1 oz Gold Bars – A Cheap Way to Invest in Gold

The same isn’t true for gold, however. When people are anxious about the economy, they tend to turn toward gold and away from traditional assets. The same cycle repeats, but in another direction. People buy more gold, which increases demand and drives the spot price of gold higher. 

Why is Gold Inflation Proof? 

This is a good question. Economists generally point to gold’s intrinsic value as a reason for its performance as a hedge against inflation. Gold has value, even during periods where its price begins to decline. This is because gold is a physical asset in short supply. We also refer to this phenomenon as scarcity. The rarer a useful material is, the higher its intrinsic value will be. 

Stocks, on the other hand, have no intrinsic value. They have value, sure. But if the company behind a stock enters bankruptcy or begins to perform badly, there’s no limit to how far a stock’s price can fall. The same is generally true for fiat currencies, but on a larger scale. The United States Dollar has value because we trust the government that produces the currency. 

If the government of the United States suddenly didn’t have the gravitas to back up their currency’s value, it becomes less valuable. In a sense, some economists say that this is exactly what’s happening when we experience inflation. 

Gold has a limit to how far it can fall, because gold is rare and people will always want it to make various items. Because of this feature, gold presents itself as an ideal way to hedge against inflation. Why is gold inflation proof? The simple answer is that gold has intrinsic value, while fiat currencies and traditional stocks do not. 

Experts Weigh In: Is Gold Inflation Proof? 

Espousing gold as an inflation proof asset has become common practice for financial advisors, so we won’t spend too much time rehashing their opinions here. writes in a Bloomberg article that they anticipate gold will be viewed “favorably as a reserve asset” because of its resistance to the effects of inflation. 

This quote echoes the sentiment of many financial analysts. There’s a reason why gold has been the reserve asset of choice for generations. Despite wide fluctuations in its value, gold is intrinsically useful and rare – making it an excellent inflation proof investment.

When Does Gold Become Less Valuable? 

Is gold inflation proof, or can it lose value? Just because gold is considered relatively inflation proof doesn’t mean it can’t lose value. Gold’s biggest benefit, non-correlation, might actually be responsible for the risk associated with investing in gold bullion. 

Let’s take a look at a couple of reasons why gold might lose value, despite its role as an inflation proof safe haven investment. 

Gold and Interest Rates

The relationship between gold and interest rates is hotly debated by economists. We won’t weigh in much on the debate, except to say this. Gold is usually going to increase in price when interest rates decrease. And when interest rates go up, this typically means that the value of gold bullion will decrease. 

Is gold inflation proof in 2023? Yes and no. While gold might help to shield your portfolio during times of inflation, it can also lose value if interest rates increase. Because the Federal Reserve tends to increase interest rates during periods of inflation, gold’s price can be unpredictable as our government wages its lifelong war against inflation. 

RCM 1 oz Gold Bar
Royal Canadian Mint 1 oz Gold Bar

Gold During Deflation 

In our ongoing discussion of the question, “is gold inflation proof,” we should take a moment to address what happens to gold prices during periods of deflation. When deflation happens, it means that goods and services are becoming less expensive. Put another way, deflationary periods are marked by an increase in the buying power of fiat currencies. 

Deflation is very uncommon, which makes it hard for us to find examples of how gold’s price might react as currency becomes more valuable. Strangely enough, economists tend to believe that gold is also a good hedge against deflation. 

Is Gold Inflation Proof and Deflation Proof? 

If this seems weird, that’s because it is. 

How can gold be inflation and deflation proof? If gold becomes attractive and more valuable when paper currency becomes less valuable, how can it possibly also gain value when currencies become more powerful? 

The answer to this conundrum has more to do with market sentiment than pure economics. Gold’s price increases when the economy enters a bear market, but this is only because investors are anxious and looking for a safer bet. When deflation happens, investors may be afraid that a crash is coming. After all, deflationary periods often require governments to take aggressive action to keep people spending money. 

Is gold inflation proof and deflation proof? While we don’t have much historical data to prove this point, the little evidence we do have suggests that gold’s price may rise when deflation enters ‘problem’ territory. 

Is Gold Inflation Proof During a Recession? 

Especially in 2023, investors are concerned about the possibility of a recession. All over the world, conflicts and looming threats of a trade war are pushing more and more consumers toward safe haven assets like gold, silver, and platinum. 

Is gold inflation proof during a recession? It’s easy to look for the perfect hedge if you’re worried that the economy might take a downward turn in the next few years. The truth is that it’s almost impossible to reliably predict how gold will react during an intense economic downturn. Historically, gold has been a reliable inflation hedge and has gained considerable popularity and value when traditional markets begin to fail. 

Will this trend hold for the next big recession? Only time will tell. 

2024 1 oz British Gold Britannia Coin
2024 1 oz British Gold Britannia Coin

Final Thoughts: Is Gold Inflation Proof? 

Is gold inflation proof or not? If you’ve read until the end of our guide, you already know that the answer is more complicated than some overzealous financial advisors and gold dealers will tell you. 

We can only speak on the historical evidence. Most economists agree that gold can function as an inflation proof investment, especially if investors begin to view gold as a way to safeguard their assets in preparation for a probable recession. 

If you’re interested in diversifying your portfolio with gold bullion, please contact our customer service team. We’re always happy to be your Bullion Hero!

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About The Author

Michael Roets is a writer and journalist for Hero Bullion. His work explores precious metals news, guides, and commentary.