Is gold still a good hedge against inflation? Experts weigh in

According to an October 12 report from the Labor Department, prices rose 0.4% from August to September while the annual inflation rate remained static at 3.7%. And, consumers are still feeling the burden on their wallets as core prices, which exclude food and energy costs, climbed 4.1% in September compared to last year. In turn, the Federal Reserve may need to continue its efforts to tame inflation.

Where inflation rates go from here is anyone's guess, and experts appear divided. Morningstar predicted that the inflation rate would fall to 3.7% in 2023 — and projects that from 2024 to 2027, the inflation rate would hit an average of below 2%, the Federal Reserve's target. However, others remain skeptical. A Federal Reserve Bank of St. Louis report, published in October 2023, even speculates on whether inflation is here to stay.

Of course, the Federal Reserve will play a major role in the direction of inflation, as it has to this point. The Fed has been fighting inflation with an aggressive rate hike schedule since March 2022, and has raised interest rates 11 consecutive times, with a pause in September 2023. And, while the current 3.7% inflation rate is still elevated, it has cooled compared to last year. So how does that affect gold's role as an inflation hedge? Here's what the experts say.

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Is gold still a good hedge against inflation? Experts weigh in

Many Americans are currently turning to gold to protect their portfolios against inflation, whether it's with gold bullion, gold stocks and ETFs or a gold IRA. The current price of gold is $1,998.00 per ounce as of October 20, 2023, and some experts believe the gold price may rise in 2024 — potentially even surpassing its all-time high of $2,074 per ounce.

Historically, gold has performed well during inflationary periods. For example, the 1970s kicked off with an average inflation rate of 5.84% and soared to 13.58% by 1980. Meanwhile, stocks suffered through an extended bear market during that time. The Dow Jones Industrial Average (DJIA) was slightly higher than 800 to start the 1970s — and only inched up to 839 by the decade's end. Overall, investors were down about 49% when adjusted for inflation during the period, according to InvestmentNews analysis.

But how did gold perform during this period? According to Nasdaq data, gold prices soared from $35 to $850 per ounce during the same decade. And, if you believe gold prices will perform well going forward, it may be a good time to buy gold.

Collin Plume, the founder and CEO of Noble Gold Investments, is one expert who believes gold is still a good hedge against inflation. 

"I don't think that will ever change, to be honest," says Plume. "There is a reason central banks use this to hedge the wealth of their own country, and billionaires use gold to hedge their billions."

Gold is known as a safe store of value for various reasons, but in particular because it's globally recognized and, unlike fiat currency, it isn't subject to devaluation by overprinting. Keep in mind, however, gold can experience wide fluctuations in the short term.

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Accordingly, American Prosperity Group founder and CEO Mark Charnet suggests gold may be better suited for long-term investors. 

"I think that gold is always a good hedge against inflation, but it ultimately depends on the holding period of the investor, who must be geared to hold the metal for at least a year or more," says Charnet.

Of course, gold prices don't always hedge against inflation. Yohay Elam, a senior financial analyst at FXStreet, notes how Treasury yields present a different picture. 

"Contrary to popular belief, gold has lost its shine as a hedge against inflation but instead provides defense against recession and geopolitical fears," says Elam, who points out the yellow metal doesn't produce a yield and it has an inverse correlation with the U.S. 10-year Treasury yields. "When investors rush to bonds in times of trouble, and returns on safe U.S. debt falls, gold shines. However, when inflation rises, and markets fear the Federal Reserve will raise short-term rates, long-term rates advance as well, weighing heavily on gold."

Charnet also suggests considering an alternative hedging option. 

"I believe that good large-cap dividend-paying stocks are a good choice, again for a period of time exceeding a one-year hold period. This could be done through large-cap dividend-paying mutual funds as well," Charnet says.

The bottom line

While many view gold as a good hedge against inflation, it may also help to insulate your portfolio from stock market losses. According to GoldSilver, the price of gold has increased during six of the eight largest market crashes since 1978.

If you're considering adding some gold shine to your portfolio, experts often recommend limiting your gold allocation to 10%. But before proceeding, consider your financial goals, risk tolerance and your overall investment strategy.