Is gold a hedge against the stock market and inflation?

Gold has been an inconsistent hedge against inflation, but keeping a small amount of yellow metal in your portfolio can still have benefits. Historically, gold has had a low or even negative correlation with both stocks and bonds, suggesting that it offers value as a tool for diversification.

Is gold a hedge against the stock market and inflation?

Gold has been an inconsistent hedge against inflation, but keeping a small amount of yellow metal in your portfolio can still have benefits. Historically, gold has had a low or even negative correlation with both stocks and bonds, suggesting that it offers value as a tool for diversification. Gold has always been seen as a hedge against inflation over time. As a result, it is the preferred asset for investors who want to ensure that their money will continue to have the same purchasing power in the future while minimizing the amount of risk they are exposed to.

When there is an uptick in inflation that remains under control, central banks will not necessarily vote to automatically increase their key interest rates. This indicates that real interest rates, calculated by subtracting the nominal interest rate from the inflation rate, will be negative for assets such as government bonds. Now, gold advocates could point to the enormous increase in the price of gold at the start of the pandemic. We also show how, between 1980 and 2000, the price of gold lost more than 40% of its value, while the CPI rose by almost 120%.

However, gold thrives by counteracting the cyclical nature of these commodities and the relative lack of liquidity of TIPS. Despite all the talk of gold as a hedge against inflation, its relation to changes in the U.S. CPI. The US is surprisingly bad (graphic).

They found that, while gold had one of the highest sensitivity to inflation—much of which would have occurred in the 1970s—, it had the lowest reliability and the worst cost. Rightly or not, gold is generally considered a hedge against inflation, a reliable measure of protection against purchasing power risk. We believe that certain types of commercial real estate offer a much better hedge against inflation than gold. According to two traders, gold's reputation as a reliable hedge against inflation is at risk, as investors find other areas of the market where they can hide from rising prices.

Low sensitivity of gold to the CPI due to a benign environment and access to other hedges. This inconclusive linear relationship does not prevent gold from being used as a hedge. The vast majority of the price of gold is determined by investors, rather than by jewelry or industrial end users or the production of gold mining. Inflation is currently at extremely high levels, but gold prices haven't fared particularly well.

Although the period between the 1970s and the early 1980s saw strong gold returns and extremely high inflation (purple dots, graph), this has not been repeated since then, partly because inflation has been much lower and partly because the relationship between gold and the CPI has been weaker.

Sharon Perrella
Sharon Perrella

Professional beer lover. Pizza geek. Devoted food advocate. Evil travel aficionado. Bacon evangelist. Typical introvert.