Is gold a good investment during inflation?

Gold is known to be a very good store of value. According to oft-cited examples, the salary of a US Army officer today, when expressed in gold terms, is roughly the same as that of a Roman centurion 2,000 years ago; and the same amount of gold would buy you a loaf of bread today as in ancient Babylon.

So in theory, it would make sense to hold some gold in case the purchasing power of your money is shrinking because of inflation. In times of inflation, demand for gold and other "hard assets" such as real estate or artwork increases, driving up their price.

Gold also benefits from a weak US dollar. When the dollar is weakening, it is cheaper for overseas investors to buy gold (whose price is denominated in US dollars), and this increase in demand can drive up the price of gold. This often coincides with higher US inflation, as the weak dollar makes imports into the US more expensive.

In actual reality, the relationship between inflation and gold prices has been more complicated than economic theory would suggest, and gold as an inflation hedge has a mixed record. The price of gold did increase significantly during the high-inflation period of the 1970s. However, gold prices fell in other periods of above-average US inflation, such as in the early 1980s or the late 1980s. More recently, gold prices fell significantly throughout much of 2022, even as inflation across the globe was soaring.

Gold prices are also subject to short-term volatility, which makes gold a less-than-perfect near-term inflation hedge. Such short-term volatility is often caused by daily fluctuations in the value of the US dollar, and shifts in gold demand from central banks, jewelers or electronics manufacturers - none of which have much to do with inflation.

Gold as a safe haven

So why is gold a good investment despite its mixed record as an inflation hedge? Gold has tended to perform well during times of wider political or economic crisis, when investors often look to gold as a "safe haven". For example, gold prices rose sharply around the 2008-09 financial crisis, and also outperformed most other asset types in the first months of the Covid-19 pandemic in 2020.

Gold has also historically shown little correlation with stock or bond prices; meaning that you can often rely on gold to keep its value even when stock or bond prices fall. This makes gold a good asset to hold if you want to diversify your portfolio in general.

There are several ways to invest in gold:

• Gold-based exchange-traded funds (ETFs)

• Physical gold such as gold bars, coins or jewelry

• Gold futures

• Gold mining company stocks or ETFs

If you want to invest in gold ETFs, the best way to do it is via an online broker. Here are some great brokers that offer gold-focused ETFs:

• Interactive Brokers
• DEGIRO
• eToro
• Trading 212
• Fidelity

For more information, check out our detailed guide on the best ways to invest in gold.