Gold Investment in Inflation | Is it a Necessary Addition?

Today we shall take a look at gold investment in inflation. How do investors put their money into gold and benefit from it during seasons of high inflation? Is it a good idea to actually invest in gold? We shall discuss all this and more in today’s post, so sit tight till the end to find out more.

P.S.

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Introduction

For about 5000 years, gold has played a significant role in the financial industry. It has been there through the rise and fall of many empires and has made it to the modern economy, where its presence is still largely significant. Gold has remained relevant throughout the highs and lows in the global market and has been an asset that has become the subject of discussion during periods of inflation and deflation.

During such times, gold has maintained its track record as a store of value and has for this reason been used to preserve wealth as well as secure the financial future of moguls and the middle-class citizens. The big question is, however, whether gold’s resilient reputation still holds up under thorough scrutiny as an asset that acts as a hedge against inflation?

Let’s find out about that in a bit.

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What is inflation?

Inflation is marked by a decline in the purchasing power of a particular currency. It points to a rise in the price level of commodities, to the extent that a unit of currency effectively purchases less than it did previously. The decrease in the value of currency implies less purchasing power for consumers as they purchase their goods and services.

This results in the general cost of living going higher, and this, in turn, leads to less participation in the market. This state of affairs is associated with a gradual deceleration of economic growth. Most economists are in agreement that sustained inflation happens when there is a situation in which the increase in a country’s money supply grows outpaces the country’s economic growth.

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Is it wise to invest in gold during inflation?

Gold has been perceived by many investors as a perfect way to hedge against inflation. This implies that over the long-term horizon, gold has managed to deliver returns that surpassed inflation.

Such information is crucial to investors since they are usually out to create a diversified portfolio that can give them inflation-beating returns so that they can achieve their financial goals, which include financial freedom and financial independence, as well as having some money to spend during their retirement years.

How does gold work as a hedge against inflation? As inflation rises, the dollar concurrently loses its purchasing power. During this period, the price of gold is usually increasing. By taking the step to convert their holdings into gold, investors end up protecting the value of their assets. Physical gold is in itself a limited resource that is not dependent on a specific central bank, which in itself adds to its overall capability to be a store of value.

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One thing to note, however, is that in the short to the medium-term horizon, investing in gold bullion to shield your assets against inflation may not appear as effective as other inflation-beating assets. An investment that effectively hedges your wealth against inflation should rise in line with the fast growth in consumer prices.

Some findings have implied that investing in gold as a hedge against inflation gives mixed results more so during periods when the inflation in the US is at a record high. This is, however, neutralized by the fact that gold has been around for thousands of years and will always be around.

Also, although the nominal value of gold is volatile, the overall value of physical gold has significantly increased over the past century, making it a viable long-term store of wealth.

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Gold bullion may, as such, not always outpace inflation, but it may effectively protect your overall portfolio from a massive decline in value. Note that you always diversify your gold assets, by choosing from a wide range of the gold that is approved for use in retirement investing.

At the time of writing this article, the inflation rate in the US is at 7.8%, which is nothing like what the U.S. has witnessed in the past. In 2020, a low year for the global economy, the returns of gold went up by about 24%. As the world adjusts to the end of the global pandemic, it is expected that the growth rate in the value of gold may not be as fast as it was in 2020. With the gradual rise in geopolitical tension, however, you can expect that gold will still hold its value.

Who should consider adding gold to their portfolio during periods of high inflation?

The value of gold as a long-term asset is undeniable. Its returns have been on the rise over the last century, and on other occasions, it has shown the resilience to bounce back from periods of turmoil. Savvy investors have known the essence of stacking their portfolios with a variety of assets that can beat inflation.

Those in need of reliable investments should consider purchasing gold. This applies to investors who can hold assets over a long-term horizon. My recommendation is that you only allocate about 10% to 15% of your retirement investment funds to gold assets.

Frequently asked questions on “gold investment in inflation”

1. How much gold should I purchase for use as a hedge against inflation?

There is no limit to the amount of gold you can purchase for the purpose of retirement investment. The actual amount may actually depend on your financial goals. I would, however, recommend that you do not put all your eggs in one basket.

While gold has its unique benefits as a retirement investment asset, it still carries with it significant risks, hence it is not a very good idea for any investor to have 100% of their holdings in gold. Most financial experts recommend that an investor should hold about 5% to 15% of their retirement funds in gold.

2. How should I invest in gold?

There are many ways in which you can invest in gold. When it comes to hedging your wealth against inflation, however, the best option is physical gold. Other paper-based gold assets such as gold mining stocks and ETFs may not offer the same protection as physical gold when inflation is soaring.

You can invest in physical gold through a gold IRA, which provides you with a defined structure to securely hold your gold bullion for a long-term investment horizon.

3. Should I invest my money in gold all at once?

This depends on your financial needs, but for the sake of today’s post, I would recommend that you invest in gold by distributing your funds over the investment period. You can, for instance, decide to purchase several coins at the start of the investment period, then automate the purchase of gold coins or bars moving forward.

Depending on the nature of your income, you can also purchase one or several coins every year, to ensure that you gain exposure to this yellow metal throughout the years, as you seek to maximize your returns.

4. Which type of physical gold is best suited for hedging against inflation?

As you may already know, gold comes in forms such as coins and bars. Both types of physical gold can be used for investment by any investor who can afford them. Provided that they meet the IRS standards for purity/fineness/gold content, then you can purchase the type of gold that you are more comfortable with.

You should, however, note that gold coins are easier to liquidate than gold bars, which is quite a significant consideration to make if you intend to immediately cash out your assets at the end of the investment horizon.

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That will be all for today’s post on gold investment in inflation. I hope that you enjoyed it, and found it informative. If you have any questions with regards to what we have discussed herein, drop them in the comments section and I will get back to you ASAP! You can also share this post with someone who would need it.

I wish you well,

Eric, Investor and Team Member at Gold Retired!