Does Gold Outperform Inflation?

Gold is often seen as a hedge against inflation because it’s a tangible asset that historically retains value even during times of economic uncertainty. When inflation rises, the purchasing power of fiat currencies typically declines. When this happens, many investors turn to gold to seek protection from currency depreciation. This is why gold is often regarded as a safe store of value, particularly during periods of economic turmoil or rising prices.

But why is buying gold a hedge against inflation? Unlike paper money, which can be printed at will, gold is a finite resource with intrinsic value. Central banks and governments cannot artificially increase its supply in response to inflationary pressures, giving it a stable and secure reputation over centuries.

Historical Performance

Throughout history, gold has had periods where it has successfully outperformed inflation. One of the most notable examples is during the 1970s when inflation in the United States soared due to oil price shocks, expansive fiscal policy, and the collapse of the Bretton Woods system. During that decade, the price of gold skyrocketed to $455 per ounce by the end of the 1970s. This dramatic increase far outpaced inflation, providing significant protection for those holding gold as a store of value.

However, gold's performance against inflation has not always been consistent. For example, during the 1990s, inflation was relatively low, and gold underperformed other assets like stocks. From 1980 to 2000, gold prices declined, demonstrating that while gold can be a powerful inflation hedge, it is not immune to broader market forces and may not always outperform inflation over every economic cycle.

Recent Performance

As of April 2024, gold has once again reached new all-time highs, partly driven by concerns over inflation and shifting expectations around Federal Reserve policy. In recent months, gold prices have surged to above $2,000 per ounce, outperforming many other asset classes as inflationary pressures persist across global economies.

To understand the change in gold prices over recent years, let’s look at Australia’s gold prices between 2020 and 2024. The price of gold in 2020 was roughly AUD 2,700, whereas by 2024 it had risen to AUD 3,868. This represents a significant percentage increase in value over this period.

Using the formula to calculate the percentage increase:

Percentage Increase = ((2024 Price - 2020 Price) / 2020 Price) × 100

Percentage Increase = ((AUD 3,800 - AUD 2,700) / AUD 2,700) × 100

Percentage Increase = (AUD 1,100 / AUD 2,700) × 100

Percentage Increase ≈ 40.74%

This nearly 40+% rise in gold prices demonstrates how gold has significantly outpaced inflation during this period, providing robust returns for investors seeking a hedge against inflation.

Gold vs Inflation Chart

Year	Gold Price(AUD per oz)	Inflation Rate (Annual %, Australia)
1920	Approx. AUD 25	15.4%
1930	Approx. AUD 25	-2.1%
1940	Approx. AUD 35	0.7%
1950	Approx. AUD 38	9.0%
1960	Approx. AUD 40	2.4%
1970	Approx. AUD 44	5.2%
1980	Approx. AUD 675	10.1%
1990	Approx. AUD 520	7.3%
2000	Approx. AUD 485	4.5%
2010	Approx. AUD 1,400	2.9%
2020	Approx. AUD 2,700	0.9%
2024	Approx. AUD 3,800	3.8%

Factors Influencing Gold’s Performance

Several factors influence gold's ability to outperform inflation, and understanding these dynamics is key to evaluating gold's potential as a hedge.

Interest Rates

When real interest rates (adjusted for inflation) are low or negative, gold becomes more attractive because it doesn’t offer a yield, unlike bonds or savings accounts. Low interest rates reduce the opportunity cost of holding gold bars, making it a more appealing option for investors seeking protection against inflation.

Economic Uncertainty

During periods of economic or geopolitical instability, gold's allure often grows. A gold bar is seen as a “safe haven” investment, and in times of crisis, investors flock to it, driving up prices.

Currency Fluctuations

A weaker U.S. dollar typically boosts gold prices. Since gold is priced in dollars, when the dollar falls, it takes more dollars to buy the same amount of gold, pushing prices higher.

Central Bank Policies

Central bank actions, particularly monetary policies such as quantitative easing and interest rate changes, can have a significant impact on gold prices. Central banks around the world hold gold reserves and their buying or selling decisions can influence global gold prices.

Expert Opinions and Forecasts

Expert analysis supports the argument that gold can serve as a robust hedge against inflation, though its effectiveness varies based on economic conditions. A 2024 report by JP Morgan suggests that the key drivers behind the price of gold have shifted, but the prices will continue to hit all-time highs.

Another report by Goldman Sachs says that typically, a 1% increase in US inflation has, on average, a real return gain of 7% for commodities. The report also notes that gold may be one of the best ways to hedge against inflation and geopolitical risks.

Conclusion

The current economic environment, with persistent inflation and geopolitical uncertainties, appears favourable for gold. While gold bars have a strong historical track record as an inflation hedge, it is essential to remember that past performance does not guarantee future results.

Ultimately, whether gold is the right hedge for inflation depends on a range of factors, including broader economic trends, central bank policies, and market sentiment. For those concerned about inflation eroding the value of their investments, minted gold remains a valuable asset worth considering as part of a diversified portfolio.