Is Gold the ultimate Inflation hedge?

“Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it.” – Henny Youngman

Inflation is on the rise. U.S. inflation figures are accelerating at the fastest rate in 13 years. The Consumer Price Index (CPI) for June rose 5.4% from a year earlier.
According to experts, inflation of around 2% is healthy for the economy. However, opinions differ widely on the subject of inflation. What is certain is that inflation does one thing above all: it takes away our wealth.
But how can we protect our assets from rising or high inflation?

First, we should clarify what the term inflation means. The term inflation is often associated with the rise in consumer prices (price inflation). This view is certainly not wrong, but it is not the actual origin of the term inflation. The term originates from increasing the money supply or money inflation. So when we talk about price inflation then it can be understood as the result of monetary inflation. This means that prices rise when more money chases the same number of services and goods or when there is a shortage of products.

And this is where gold comes into play. Since the value of gold increases in times of crisis, gold is also called a safe haven. In fact, the price of gold has steadily increased since President Nixon took the U.S. dollar off the gold standard in 1971. When looking at the money supply since 1971, one notices that the money supply has been steadily increasing. But what has also increased is the price of gold. Figure-1 shows the m2 money supply in circulation vs. the price of gold.

Chart-1

Figure-1
Source: fred.stlouisfed.org

The graph clearly shows that the monetary system has been steadily pumped up. As the money supply increased, so did the price of gold.
But what about the performance of gold against the CPI data often used to measure inflation? Let’s look at Chart-2 and.

Chart-2

The chart shows no clear correlation between the CPI index and the price of gold.

So can it be argued that the price of gold has no correlation with consumer purchasing power?

What is the argument for that?

As mentioned above, there is no clear correlation between the CPI index and the gold price. If we measure inflation using the CPI, then the years in which the CPI was high but gold prices fell can certainly be an argument against gold.

So is gold not the safe haven we had hoped for?

Let’s look at the other side.

We have already discussed the origin of the term inflation and price inflation can be seen as the result of currency inflation. Pulling the CPI as an argument against gold is extremely fuzzy because the goods with which the CPI is calculated are replaced by other goods over time. If more expensive goods are replaced by cheaper ones over time, the CPI can be kept low.
If one looks at the gold price, however, one notices that with increasing money supply the price of gold increased. That means we have to spend more fiat money over time to buy the same amount of gold.

Another argument for this is the timelessness of gold. Gold has been considered a store of value since ancient times. Gold is a limited natural resource in this world. This means that only a certain amount of gold is available.

Gold does not belong to any currency system, because it is a precious metal. Since it does not belong to any system, it can also be considered crisis-proof. For example, governments with their central banks hedge against crises with their gold reserves. This also includes a hedge against a weakening U.S. dollar. Now, an inflation rate of about 5% is not yet a crisis, but what if inflation turns into hyperinflation? Several examples from the past show how seemingly safe systems can collapse and hyperinflation can break out. To exclude this scenario would be more than negligent especially in our time. Is it a coincidence that central banks are hedging with gold? Probably not and this should give everyone food for thought who has not yet thought about a gold investment as a hedge.

So is gold the ultimate inflation hedge?
It is, in our opinion. But not only against inflation. Gold is a hedge against currency crises in general and will outlast many fiat currencies to come.

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