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The Historic Relationship Between Gold and Inflation

Read practically any page online about why you should invest in gold, including many of my own, and you’ll see many people proclaim that gold is a great investment when there is a lot of inflation going on. Okay, it might even be a great investment when there’s a little deflation going on. In any event, investors flock to gold to protect their wealth from inflation.

The general idea is simple. Inflation decreases the buying or spending power of fiat currency, such as the American dollar. However, since gold is a physical commodity, it holds its value even when currency is going down.

In fact, inflation has been known to drive the value of gold up. This has happened several times in the past. A sheer increase in demand for gold during inflationary periods can drive up the price.

However, what are the real effects of inflation on gold? Why do these things happen? These are good things to know if you want to look to gold as a safe haven against inflation now or in the future.

Historical Precedent

Inflation in recent months and years has been something novel and new, although not in a good way, for a lot of people. Anyone that lived through the 1970s isn’t among them, however. They remember what happened.

That’s a decade where gold values grew faster than the stock market, and it was also a decade chock full of inflation. There was also localized inflation in certain regions of the world during the Great Recession of 2008. In those places, gold did better than many other investments because of inflation.

Running the Other Way

Given the historical precedent of gold rising during times of inflation, a sheer increase in interest and demand can drive its price up during inflationary periods. However, that’s not all that happens. Gold has a negative correlation with the stock market.

What is a negative correlation? In this case, it means that when stocks go down, the value of gold goes up. Stock prices tend to go down during inflation because people simply don’t have as much money to invest in the stock market.

Inflation Itself Can Be the Culprit

While gold is often touted as a hedge against inflation, it might actually be that inflation is why gold values go up. Rather than inflation and gold values being two things that happen together as a pair, they are actually one and the same.

Inflation has two components to it. One is prices for things going up. Two is the value of money going down.

Gold is not money, and that’s why many investors cherish it. It is in fact a commodity and a very physical thing. So, it only makes sense why its value might go up when inflation is raising prices for many other goods, products, and even services.

So what puts pressure on gold for its prices and values to go up? It turns out there are plenty of things. For starters, investors continually clamor for it but the supplies of it globally are limited.

Gold mining leveled off about 15 years ago and stayed flat for around a decade. After a short growth spurt, they have since tapered off again, even with rising global demand. It’s very possible that all the easily found or mined gold is already on the market, and the rest will be more difficult to access.

Emerging markets, such as India and China fuel a lot of that global demand. Gold bars are a traditional savings technique in Chinese culture. The average global annual peak for gold prices is usually October, which is also when India’s wedding season, complete with gold jewelry, is also in full swing.

Gold also has a number of industrial applications. These range from GPS units to medical technology.

Cryptocurrencies Might Take Some of Gold’s Power

With inflation right now and in the future, there might actually be one thing that keeps gold from doing as well as it used to. That is cryptocurrencies. Many investors look into it as a hedge against inflation just as much as gold.

Some investors are starting to invest in both alternative asset classes. Younger investors might even be more focused on crypto than precious metals.

Whether or not cryptos can actually be a trustworthy hedge against inflation is something we might not know for decades, given how relatively new they are against the history of gold. However, if they draw any attention away from gold, that can be a contributing factor to lower demand and lower value.

I only mention this as a cautionary element. There are still plenty of reasons to invest in gold, and there are more than enough people interested in it to keep upward pressure on its prices and values.