Gold May Not Protect You From Inflation

If you think gold is a sure fire defense against inflation, think again. Lots of people have been intrigued by gold’s recent price increase — at least until recently — and it’s being heavily marketed as a way to protect against inflation. But history does not bear this out. You should be skeptical of salesmen spinning stories about gold and its mystical wealth preservation powers.

Think about this, if gold were a guaranteed hedge against inflation, why did the price of gold fall from about $850 in January 1980 to about $250 in 1999? If you bought gold at $850 in 1980 during the last inflationary panic, you’d have waited about 28 years (until 2008) for it to regain its initial value. Not much of an inflation hedge.

Instead of thinking of gold as a direct inflation hedge, in modern markets it may serve more as a “financial panic” hedge. Investors were panicked about a financial collapse in the early 1980s and also today, and gold rose during each of those panics. But when the panic subsides, gold also tends to lose its luster.
There’s nothing wrong with owning gold. But consider that if you own a diversified portfolio of stocks, such as the S&P 500, you have ownership in mining and other companies that derive their earnings from the commodity markets. If commodities are doing well, those companies are often doing well. So you have some skin in the