Gold as a hedge against inflation


Gold, the dense, soft and shiny metal has been associated with man since time immemorial due to its high value, with gold standards being the most common basis for monetary policies until they were widely supplanted by fiat currency as in the past century.

Why opt for gold:

The uncertainty in the global economy in present times has dampened investment returns from different asset classes. Moreover, with inflation levels rising across the globe coupled by a surge in fuel prices, investors are increasingly looking at gold as an investment instrument that can provide safety and value to their investments. Though the debate that whether gold could be a hedge against inflation could go on, with some arguing otherwise, as they feel that a rise in inflation would also result in a spike in gold prices, one must remember that the precious metal is money (wealth), unlike other commodities that are used for production and consumption purposes only.

Gold is the premier store of wealth and this fact remains unchanged even though it is not the official currency anymore. And it is especially during periods of high inflation and economic crises that one needs an effective preserver of wealth or buying power.

Inflation and Gold

If inflation were to run its full course, as it happened in Zimbabwe, which went under a period of hyper inflation, the only bankable asset would be tangible assets. Paper currency could become worthless as well as debt denominated in that currency. This means that prices in paper currency terms would also be of no meaning. All assets are then priced in terms of other assets, especially those that have monetary properties and will trade at a premium because they are more useful in asset exchange transactions. In such situations, gold acts as the perfect hedge against inflation. Even if just a quarter of one’s investments are in gold, they can make up for other investments that are not keeping up with inflationary trends.



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