Gold and silver are two of the best long-term inflation hedges possible, which is one of the biggest reasons I’m a huge fan, and continually add gold and silver to my portfolio.
But how exactly is gold an inflation hedge? After all, during the 90s, gold did abysmally, even though inflation stayed fairly consistent. Is gold sometimes not an inflation hedge? The answer to these questions is fairly simple, and requires us to look into how exactly the gold market works.
If you’re investing precious metals to beat inflation, you should probably keep doing so — but you should also know what to expect.
Nothing Beats Economics
First, this is going to sound obvious, but nothing beats the laws and principles of economics. Supply and demand — artificial or organic — dictate prices. Period. Gold isn’t magical, and it’s value will collapse if people suddenly lose faith in the metal. I don’t think this is necessarily going to happen, but it’s an economic fact that has to be considered.
That said, this non-immunity to the laws of economics is what makes gold a great long-term hedge against inflation (everyone has always loved and trusted gold) and a fairly weak short-term hedge against inflation (people trying to predict gold prices and time the market mess up the short-term price of gold — it’s volatile). Let’s analyze this in further detail below.
Gold Isn’t a Short-Term Hedge
Gold doesn’t beat inflation in the short-run. During the 90s, we had inflation, but gold prices remained fairly flat. The same during the 70s and other decades where gold didn’t do great.
Historically, if inflation hits 3%, gold doesn’t necessarily rise 3% to keep up. Over time, however, that’s a different story, as we’ll talk about immediately below.
Over Time, Gold’s Value is Fairly Consistent
Over the long term, the story is different. No company comes close to being as old as gold. No non-gold based currency has lasted anywhere near that long.
Over 50 years, most currencies become essentially worthless. Gold keeps value. This is absolutely unavoidable, and something a lot of anti-gold writers tend to ignore. No matter what, gold has value in the market — and only a few other hard assets like silver are even comparable.
- Over the long term, cash is destroyed by inflation.
- Over the long term, bonds are destroyed by inflation.
- Over the long term, companies collapse and get destroyed.
- Over the long term, gold and silver are forever. This is unavoidable.
Short-Term Profit vs. Long-Term Security
The short term major price fluctuations for gold and silver is one of the reasons many people try to buy and sell gold and silver at the right times to get rich. There’s nothing wrong with this — it’s just something I don’t particularly care to do. I buy my silver consistently over time (learn how I do this here).
In the end, I value financial security over any other financial value. I think it’s the first stage of financial success, as I wrote over at Stand Strong Research just today. I believe everyone should own gold, silver, a generator, food and water, and land. It’s just the first step toward financial success, prosperity, and independence.
Is gold a good inflation hedge? Over the long run, yes — and no currency or stocks can even come close.