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Why you should buy gold during inflation

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Many view gold as a hedge against inflation because its price tends to rise when the dollar loses value as a result of inflation. Getty Images

Buying gold is a smart way to add stability to a diverse portfolio, especially if you're looking for a hedge against inflation. There are several ways to buy gold, from physical gold and miners' stocks to gold IRAs and other forms of the precious metal. Perhaps the easiest way to purchase the yellow metal is to buy shares of gold Exchange Traded Funds (ETFs), saving you the trouble of storing it.

As it has been for thousands of years, gold remains a valuable commodity today. Investors and non-investors alike buy gold for its unique benefits. For one, buying and holding gold is easy; you don't have to worry about earnings reports, dividends, payments and other features. Its main job is simple; store value for you long-term.

It's this primary benefit that attracts those looking for a safe haven for their money in uncertain times. With rising inflation and fears of a looming recession, now may be a good time to invest in gold. 

If this sounds like something you think you could benefit from then reach out to a gold expert today who can help get you started. 

Let's dive deeper to understand how gold acts as a hedge against inflation and who benefits from buying gold in an inflationary economy.

How and why gold acts as a hedge against inflation

Gold tends to hold its value for longer than many other types of assets. As such, it can act as a hedge against inflation, when buying power for prices for goods and services decreases.

Inflation has been the story of 2022, hitting a 40-year record in June, with consumer prices rising 9.1% year-over-year across numerous sectors. The most recent Consumer Price Index report shows prices for goods and services rising 8.2% this September over the previous 12 months.

Meanwhile, the Federal Reserve is following an aggressive interest rate hike schedule this year — the benchmark rate is currently 3% to 3.25%. That's a significant spike from the 0% to 0.25% levels one year ago, but it doesn't keep pace with the rate of inflation over that period.

Research from the World Gold Council states that when the inflation rate outpaces interest rate increases like we're seeing, commodities like gold may outshine some traditional financial assets. When the value of the dollar decreases, people seek out gold and other safe and stable places to put their money to hedge against inflation.

Consider this: The 1970s was a decade of inflation, starting with an average interest rate of 5.84% in 1970 and ending with a whopping average rate of 13.58% in 1980. During the same period, the gold value soared from $35 per share to $850 per share, according to NASDAQ data.

Like other asset classes, gold may not continue to follow past trends, and it's impossible to know whether its price will rise or fall. Still, many investors view gold as a hedge based on its past performance in inflationary environments. 

That's why you should explore your gold options now before the price rises again. Reach out to a gold expert who can advise you on your options.

Who can benefit from buying gold during times of inflation

You might consider buying gold if you're concerned about the current market turmoil. Commodities like precious metals may withstand cash flow issues and currency devaluations better than other asset classes.

Older people are often associated with gold, but young people may benefit from allocating some portfolio space for gold. Investors in their twenties and thirties generally have decades to save for retirement. Consequently, they can withstand the financial risk more than an older person might.

If you're maxing out your retirement contributions and investing in your brokerage account, you may benefit from adding a stabilizing commodity like gold to your portfolio. While it's unlikely we'll experience a doomsday scenario that brings back the bartering system with physical products, holding a specific percentage of your assets in this form may be beneficial. If your other assets drop substantially, your gold shouldn't fall as much, and they may even gain value.

Which other times is it beneficial to buy gold?

Gold is known to have a negative correlation with stocks, meaning when the stock market falls, gold often rises. Perhaps that's why a gold investment during a recession may make sense.

According to data from GoldSilver, the price of gold rose during six of the eight largest stock market crashes over the past four decades. During the recession from October 9, 2007 through March 9, 2009, the S&P 500 plummeted 56.8%. By contrast, gold prices spiked 25.5% during the same period.

You don't always have to wait for a recession or market crash to profit from gold. According to GoldSilver, certain months are historically better for purchasing gold. Analysis of the average daily performance of gold between 1975 and 2021 revealed that January, March, early April and mid-June to early July are the best times to buy gold.

Bottom line

Precious metals like gold and silver are often seen as a hedge against inflation because they preserve their purchasing power for long periods of time. So while stocks and other assets may experience large fluctuations, the price of gold may be more stable.

Gold can be volatile in the short term, and it generally doesn't appreciate the same as a stock or a bond over the long term. As a result, financial advisors often recommend investing no more than 10% of your savings in gold.

Before purchasing physical gold or a gold-backed investment, consider the pros and cons of investing in gold, your budget, goals, and risk tolerance. 

Speak to a gold adviser now who can help you get started with a plan that works for you.

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