Inflation has emerged as a primary concern for investors.1 On balance, arguments for ‘uncomfortably high’ US inflation seem to outnumber those against, at least in the near term.2 A natural consequence of such a risk is for investors to seek protection against it. Gold is a proven long-term hedge against inflation but its performance in the short term is less convincing. Despite this, our analysis shows gold can be a valuable component of an inflation-hedging basket.
We also show that gold protects purchasing power in the long run against more than just the price of goods and services. In tracking money supply, gold can help investors protect against potentially excessive asset price inflation and currency debasement.
Why inflation is currently a concern
As the global economy and financial markets begin to recover from the COVID-19 pandemic, a chief concern for many investors is the somewhat novel prospect of ‘high’ inflation – particularly in the US where investors have been used to low levels of inflation for more than three decades.
Although both the output gap and unemployment remain high, the quick economic recovery has left many areas of supply tight. Commodity prices are reflecting this, as are shipping rates and business inventory data. In addition, the massive increase in global government debt as well as central bank acceptance - if not promotion3 - of higher inflation suggest the risks are, on balance, skewed to the upside. Both Main Street and Wall Street have taken notice (Chart 1).