InvestmentNews - Answering the ancient question: Does gold fight inflation or not?

March 20, 2023
Phil Kosmala, CFA
10 Minutes

Phil Kosmala, CFA

Managing Partner

Stay up late enough watching cable TV and you will more than likely be told to buy gold. Not only that, you’ll also be informed of the scary reasons why.

Geopolitical uncertainty almost always tops the list, including the disturbing idea of an intercontinental military conflict. Likewise, the possible collapse of the global banking system and proliferation of cyberattacks by rogue states commonly come up as justifications for loading up on the yellow metal. Voracious commodity demand from up-and-coming economic rivals like China and South Korea provides yet another.

Unnerving as they may be, there is merit in each of those reasons to hold a tangible asset like gold and certainly enough to pick up the phone and purchase a 24-carat commemorative coin or two for security’s sake, if not merely to get back to sleep.

Of course, once you’ve been scared into submission, the infomercial will then veer into the more traditional rationale for owning the precious metal, which is gold’s long-heralded ability to maintain its value during periods of heightened inflation. Gold has been touted for centuries as a hedge against rising prices, most recently showing its mettle (pun intended, we’re talking about gold here) during the great inflation of the late 1970s and early 1980s,when it surged in value by more than 50% per year.

The real question one needs to consider before buying gold is whether it remains the stellar inflation-fighting strategy it proved to be during the years between disco’s twilight and Reagan’s morning in America. Or whether investors and advisors are better served more than four decades later employing alternatives like TIPS, alternative metals or crypto to combat the scourge of rising prices.


The hedge against inflation is the traditional motive for investing in gold, full stop. However, its true ability to shine in the face of inflation may be the most debated and ambiguous issue in the financial press and academic literature.

“While many investors may like to keep a small slice of gold or other precious metals in their portfolio, gold is not effective on a larger scale as a reliable hedge against inflation and entails more price volatility than most investors can stomach. There is no guarantee if there is a spike in inflation that gold will also generate above-average returns,” said Jeremy Gottlieb, CEO of Gottlieb Wealth Management, which is part of Integrated Partners.

As evidence supporting Gottlieb’s stance, investors seeking salvation in gold during last year’s inflation explosion were deeply disappointed as gold returned only 0.4% in 2022. Meanwhile, consumer prices for all items rose 6.5%from December 2021 to December 2022, according to the Bureau of Labor Statistics.

“To say gold is a reliable hedge against inflation would perhaps be offensive to inflation. During a two-year period of substantial inflation since March 2021, it would be hard to argue that gold has been a reliable hedge against real inflation as price inflation within indices such as CPI have outpaced the very modest appreciation in gold prices over that period,” said Paul Keeton, managing director at Prospera Financial.

Perhaps surprisingly, George Milling-Stanley, chief gold strategist at State Street Global Advisors, admits that gold historically has not proved to be an effective hedge against sudden changes in the rate of inflation. That said, he points out that gold has offered returns superior to those on most competing assets whenever inflation has been “sustained” at a high level.

“For the purposes of this argument, I am using ‘sustained’ to refer to periods of greater than one year, and preferably several years, and ‘high inflation’ as being above 5% a year. Over the past 50 years, during such periods gold has generated average returns of around 15% a year,” Milling-Stanley said.

Rick Nott, senior wealth advisor at LourdMurray, approaches the question another way, by comparing the real, or inflation-adjusted, price appreciation of gold against the S&P 500 since 1970. What he found is that the real price of gold appreciated 586% over that period, while the S&P 500 rose526%.

“This is an admittedly flawed analysis because the S&P 500 pays dividends on average of 2%, which compounded certainly beats gold, but to answer your question, yes, it has historically been a good hedge based on this data,” Nott said. “It’s worth noting, however, that the majority of that return came in the ’70s.”


OK, so what about gold’s value as an inflation hedge beyond the past half century or so?

“Quantitatively speaking, gold is a reliable hedge against inflation. In fact, it is the best hedge against inflation, with a correlation of 0.34 since1900. Only commodity futures come close, with a correlation of 0.21,” said Phil Kosmala, managing partner at Taiko, a full-service OCIO for RIAs.

Jonathan Rose, co-founder of Genesis Gold Group, takes yet another approach when looking at gold’s historical performance versus not just inflation, but the entire economy.

According to Rose’s calculations, gold has long maintained a strong negative relationship with the U.S. Dollar Index (DXY) and that relationship generally leads to a strong case for gold when the dollar itself is weakening.

“When correlated directly between the price of gold and CPI levels, the connection between the two is a bit tenuous. However, when looking at the myriad economic conditions associated with a recession, the case for gold is clear as a consistently reliable hedge against economic downturn,” Rose said.

It’s worth noting here that the classic case for gold as a hedge has to do with the preservation of purchasing power. Rose provides a great example, going back well
beyond the 1970s.

“Back in the 1930s, gold was valued at around $20 per ounce. That same $20would have afforded you a well-tailored suit during that period of time. Nowadays, that same ounce of gold is worth closer to $2,000 or more, depending on the form. That amount in U.S. dollars will still buy you a fairly high-end tailored suit. However, a $20 bill today won’t even afford you a tie to go along with that suit,” Rose said.

And what about gold’s recent disappointing performance versus inflation?Well, to some it depends on the type of inflation.

“Although gold was surprisingly disappointing in the elevated inflation of2021 and 2022, the classic arguments for gold being a hedge against inflation still hold,” Kosmala said. “However, we must keep in mind that there are different types of inflation. For instance, energy futures perform well during cost-push inflation — supply shocks — while industrial metals are a better hedge during periods of demand-pull inflation like robust economic growth.”


As the name implies, Treasury Inflation Protected Securities, known as TIPS, are set up to protect investors against inflation. Whether they provide a better option than gold is once again a long-standing point of contention.

As for the basics, the principal, often called par value or face value, of a TIPS goes up with inflation and down with deflation. The Treasury sells TIPS with maturities of 5, 10, or 30 years (although not via a late-night infomercial.) When a TIPS matures, the buyer gets either the increased price or the original principal, whichever is greater. The original principal, however, is not just guaranteed, but is guaranteed by Uncle Sam himself.

“Government bonds are more secure and have also been shown to pay higher rates when inflation rises, and Treasury TIPS provide inflation protection built in. Investors might consider upping allocations to other asset classes: stocks, TIPS, REITS, and commodities as a better inflation hedge. These asset classes have a more consistent track record during inflationary periods than gold, typically when examining periods of less than five years,” Gottlieb said.

Not so fast, says Genesis Gold Group’s Rose, who points to another study by MacroBond, which analyzed the performance of gold and TIPS over the 15-yearperiod between 2005 and 2020 and found their performance nearly identical.

Kosmala, meanwhile, finds commodities futures to be the best overall hedge against inflation. Nevertheless, he chooses gold over TIPS primarily because they are highly susceptible to interest-rate moves and investor expectations about future inflation more than actual inflation. As a result, he believes investors may not always see the returns they theoretically might expect.

“Last year was a great example, with TIPS posting sizable losses despite40-year-high inflationary readings,” Kosmala said.

For the record, Morningstar Direct’s inflation-protected bond category reported a loss of 8.9% in 2022 compared with an 18.1% drop in the S&P 500and a 0. 4% return for gold.

Also on gold’s side in the TIPS debate is Milling-Stanley, who says the precious metal not only provides superior protection against inflation but offers all the other benefits of an allocation to gold, including greater diversification, the potential for enhanced returns, and improved liquidity.

And perhaps that sleep-at-night security as well, considering gold returned40.5% between September 2007 and July 2008, which was the period immediately prior to Lehman’s collapse, compared to return of 10.1% on TIPS, according to Morningstar Direct.

“TIPS and I bonds pay inflation over time as it is accrued. That can make them more accurate at capturing realized inflation for long-term investors. Of course, one of the big risks is that TIPS are priced based upon the real interest rate, which often rises during periods of inflation as the Fed tightens. As a result, TIPS typically fall on a mark-to-market basis even when inflation rises,” said Bob Elliott, CEO of alternative fund provider Unlimited.


“Silver, platinum and palladium are all used primarily in industrial applications, with only minimal consumption in jewelry or as an investment, and zero interest from central banks and governments in adding them to official reserves. As such, prices of these metals tend to broadly follow trends in GDP growth in the industrialized world,” said State Street’s Milling-Stanley.

“I am not aware of any research showing a direct correlation between economic growth and inflation, even if that might seem likely,” he added.“ Gold, on the other hand, has myriad end uses and consumption is truly global.”

As for their 2022 full-year returns, when CPI was averaging over 8% on a monthly basis, silver returned 3.73% and platinum was up 7.5%, while palladium dropped 10.4% for the year.

“Each precious metal has its own investment characteristics, making it difficult to advise any investor on which precious metal to choose. Most people begin with gold or silver because they are more familiar with them. A diversified portfolio is your best way to hedge against inflation,” Gottlieb advised.

An advisor’s macroeconomic viewpoint also might drive which precious metal is optimal for use in client portfolios.

Gold, for instance, would be preferred in an environment where an investor is seeking to hedge purchasing power or the debasement of their local currency. However, inflationary pressures caused by strong demand and robust economic activity might lead an advisor to allocate more prominently to silver, platinum and palladium because of their industrial uses, as well as their inflation-hedging capabilities.

“Palladium has a very specific use in catalytic converters. Therefore, if you had a very bullish outlook on auto sales, as well as an above-trend forecast for inflation, palladium would be preferred even over gold and silver,” Kosmala said.


Gold’s ability to store value goes back to biblical times. The power to buy and sell bitcoin, on the other hand, barely goes back to 2009. And boy, it’s been a wild ride for the new currency on the block(chain), capped off by last year’s loss of 65% of its market value.

“Cryptocurrencies as a complex lost two-thirds of their market capitalization in just a few weeks during 2022 and have shown no signs of recovering to former elevated levels. This was in a year when U.S. inflation reached its highest level in 40 years,” Milling-Stanley said. “On the evidence available, cryptocurrencies including bitcoin do not fight inflation better than gold.”

Though it’s hard to argue with those numbers, there is a bit more to the story. Bitcoin did go on a tremendous run once the pandemic hit, trading from less than $5,000 in March 2020 at the start of the Covid crisis to recent levels of almost five times that amount.

“Bitcoin can indeed be considered a hedge against inflation, but only in the long run and with a significant degree of risk. That is, if one removes from this assessment the need to have a low level of risk, such as gold, bitcoin does indeed seem to be a candidate as an inflation hedge,” Gottlieb said.

In Gottlieb’s view, bitcoin’s pandemic surge was fueled by institutional investors turning to crypto because they were fearful that government spending would lead to inflation, another point that’s hard to argue considering the hundreds and hundreds of billions of dollars the government shoveled into the economy while millions of Americans were laid off or ordered to stay home from work.


Much to the chagrin of old-school “gold bugs,” bitcoin is indeed similar to the yellow metal in more ways than gold traditionalists might be willing to admit.

“Ultimately, I think it has the same long-term dynamic as gold. In other words, as long as there is a demand for it, or people value it, then it will have some value in the market whether you are in the ‘intrinsic value’ camp or not,” said LourdMurray’s Nott.

Academically speaking, it seems too early to make the call in the battle between gold and bitcoin. There’s simply not enough historical evidence on bitcoin or any cryptocurrency to understand how cryptos will react in inflationary environments. Last year proves that point.

Moreover, the global cryptocurrency regulatory crackdown is still evolving as the SEC doubles its efforts to regulate the space, Kosmala said, adding that he empirically does not advocate using cryptocurrencies as an inflation hedge.

“Gold has demonstrated over thousands of years a reliable hedge against both very high and very low inflation environments. As a result, it is a better portfolio diversifier given crypto has relatively uncertain return drivers,” Elliott said.

Originally Published by: