Gold is famous as being a hedge against inflation.
Because gold exists in a fixed amount, it can’t be increased in number when a central bank needs more money. As we see today, this isn’t true of currency. Because it is no longer backed by gold or other precious metals, if a central bank decides it needs more currency, all it has to do is print more.
Historically gold has been a strong hedge against inflation. In the five years in the post-War era in which inflation has been highest, the return on gold has also been the highest. In fact, if you look at the prices to purchase items such as clothing or food, you’ll find that the same amount of gold required to purchase an item at the beginning of the Twenty-first Century is about the same amount of gold required today.
But let’s say that gold is a less direct hedge against inflation. It would still be a good idea to invest in gold today as inflation appears to be around the corner. Why is that?
Gold vs. Stocks
Independent of gold prices, the value of stocks has underperformed in periods of economic unrest. A period of high inflation would certainly be considered a period of unrest economically. If this is the case, do you want to have your entire investment portfolio in stocks? Of course not.