This year, gold’s image as an inflation hedge has tarnished.
According to London Bullion Market Association (LBMA) pricing, the gold has dropped roughly 5% to $1,782.05 in 2021. Inflation, on the other hand, has shifted in the opposite direction, with the US consumer price index (CPI) showing prices up 6.2 percent from a year ago in October. This is the most rapid increase in consumer costs in 30 years.
One of the reasons gold is considered as an inflation hedge could be due to the closing of the “gold window” by US President Richard Nixon in August 1971. Central banks all around the world had previously been able to convert US dollars to gold at a fixed rate of $35 per ounce. After Nixon cut that relationship, inflation soared, and the price of gold soared as well. According to the Wall Street Journal, this apparent correlation may have encouraged many to feel that the precious metal might safeguard investors from the erosion of increasing prices.
Can crypto replace gold?
According to research released by Claude Erb, Campbell Harvey, and Tadas Viskanta, there is insufficient evidence to back up the claim that gold maintains purchasing power. Gold prices, according to Harvey, a finance professor at Duke University, have traditionally been too unpredictable to be used as a short-term inflation hedge. Meanwhile, some gold investors may have recently switched to crypto assets like bitcoin as a hedge against growing consumer costs. However, bitcoin is around five times more volatile than gold.
“Cryptocurrencies are far more volatile than gold and will likely be unreliable for short-term swings” in inflation, according to Harvey, who pioneered the use of the yield curve to anticipate recessions. When investors are afraid, virtual coins tend to plummet, which is when traders typically dump riskier assets like equities, gold, and bitcoin, he noted.
How can savers protect themselves from the effects of inflation?
If prices rise, it’s not all doom and gloom for savers. TIPS are US Treasury bonds that are linked to the consumer price index. If the CPI rises, the bond’s principle rises; if the CPI falls, the bond’s principal falls. TIPS are pricey, according to experts, and offer little yield by historical standards. However, if investors are concerned about near-term increases in consumer prices, they can use them to hedge their assets.
While insuring against inflation is difficult, finding assets that outperform rising prices may be easier. According to Dimensional Fund Advisors’ research, a wide range of assets, including bonds, stocks, and commodities, have outperformed inflation when held for longer periods of time.