Is Gold an Inflation Hedge?

Discover the complex relationship between gold prices and inflation rates in this research analysis

Gold is one of the primary investment choices during periods of high inflation. When governments print more money, its value drops but no one can “print” gold. For thousands of years, gold has served as a reliable store of value. But is gold truly effective at preserving wealth during inflationary periods?

Paper reviewed: Baur, Dirk G., Is Gold an Inflation Hedge? (August 13, 2025). Available at SSRN: https://ssrn.com/abstract=5389663 or http://dx.doi.org/10.2139/ssrn.5389663

Summary

This study investigates whether gold serves as a reliable inflation hedge, analyzing its performance from 1971 to 2025 and revealing nuanced findings that challenge common assumptions about gold's role in investment portfolios

Key Findings

• Gold is not a consistent inflation hedge over the period from 1971 to 2025; it does not move one-to-one with inflation.
• Gold prices have outperformed inflation and money supply over the long term, preserving purchasing power.
• Regression analyses show that changes in CPI, inflation rates, and real interest rates have very low explanatory power on gold price movements.
• Gold reacts strongly to large inflation rates and shocks, exhibiting a threshold effect.
• The reaction of gold to inflation expectations, particularly 1-year and 5-year expectations, is significant.

Implications

Business and Policy Implications

• Investors and portfolio managers should not rely solely on gold as an inflation hedge; its performance is influenced by various factors beyond inflation.
• Policymakers should consider the multiple drivers of gold prices when assessing its role in the economy.
• Businesses can use gold as a diversification tool, but should be aware of its complex relationship with inflation.

Introduction

The notion that gold serves as an inflation hedge has been a topic of debate among investors and economists. The relationship between gold prices and inflation is complex, with gold often being viewed as a store of value. This paper examines the role of gold as an inflation hedge, analyzing its performance over several decades.

Background and Context

Gold has historically been considered a hedge against inflation due to its perceived ability to preserve purchasing power. However, empirical evidence on its effectiveness as an inflation hedge is mixed. The period since the end of the Bretton Woods system in 1971 has seen significant fluctuations in both gold prices and inflation rates, providing a rich dataset for analysis.

The literature on gold as an inflation hedge is extensive, with various studies presenting differing conclusions. Some research suggests that gold can act as a hedge against inflation, particularly over longer time horizons or during periods of high inflation. In contrast, other studies have found that the relationship between gold prices and inflation is not straightforward, with gold not consistently moving in tandem with inflation.

This paper contributes to the existing literature by examining the relationship between gold prices and inflation over an extended period, using various data frequencies and analytical techniques. The findings of this research have implications for investors, policymakers, and businesses seeking to understand the role of gold in their portfolios and economic strategies.

The analysis begins with an examination of the long-term trends in gold prices, inflation, and money supply. Figure 3 illustrates the evolution of these variables from 1971 to 2025, showing that gold has significantly outperformed both inflation and money supply over this period.

Further analysis involves regression models to assess the relationship between gold price changes and various inflation-related variables. The results indicate that while gold preserves purchasing power, it does not act as a traditional inflation hedge. Instead, gold prices are influenced by a range of factors, including inflation expectations and real interest rates.

The threshold effect observed in the data suggests that gold reacts differently to high inflation rates compared to normal or low inflation environments. This finding is consistent with the safe haven property of gold, where it tends to perform well during times of economic stress or high inflation.

The implications of these findings are significant for investors and policymakers. For investors, understanding the complex relationship between gold and inflation can inform portfolio diversification strategies. For policymakers, recognizing the multifaceted drivers of gold prices can aid in the development of economic policies that account for the role of gold in the financial system.

As the analysis continues in Part 2, it will delve deeper into the dynamics of gold prices and their relationship with economic variables, providing further insights into the role of gold in the modern economy.

Main Results

The analysis of the relationship between gold prices and inflation reveals several key findings. The data spans over 50 years, from 1971 to 2025, and includes various economic variables such as gold prices, US Consumer Price Index (CPI), US inflation rates, US money supply (M2), and real interest rates.

Gold as an Inflation Hedge

The study finds that gold is not a consistent inflation hedge over the entire sample period. While gold preserves purchasing power and acts as a store of value, its price movements do not closely follow inflation rates. The regression analysis shows that changes in CPI, inflation rates, and money supply have very low or no explanatory power on gold price movements.

Threshold Effect

However, the analysis reveals a threshold effect, where gold prices react strongly to large inflation rates and shocks, but not to average or "normal" inflation rates. This finding is similar to the safe haven effect, where gold prices are negatively correlated with stock market returns during times of extreme stock market losses.

Inflation Expectations

The study also examines the relationship between gold prices and inflation expectations, based on survey data and market data. The results show that gold prices react strongly to 1-year and 5-year inflation expectations, with a stronger reaction for annual data than for quarterly or monthly data.

Methodology Insights

The research approach used in this study is based on a comprehensive analysis of historical data, including regression analysis, Vector Autoregressions (VARs), and threshold regressions. The use of different data frequencies (annual, quarterly, and monthly) allows for a nuanced understanding of the relationships between gold prices and economic variables.

The methodology is important because it provides a robust framework for analyzing the complex relationships between gold prices and inflation. By using a range of econometric techniques, the study is able to identify patterns and trends that may not be apparent through simpler analysis.

Analysis and Interpretation

The findings of this study have significant implications for investors, policymakers, and researchers. The results suggest that gold is not a simple inflation hedge, but rather a complex asset that reacts to a range of economic variables, including inflation expectations and shocks.

Practical Implications

For investors, the study highlights the importance of understanding the multifaceted drivers of gold prices. Gold can be a useful diversification tool, but its performance is not closely tied to inflation rates. Instead, gold prices are influenced by a range of factors, including inflation expectations, real interest rates, and global economic trends.

For policymakers, the study suggests that gold prices can provide valuable insights into market expectations and sentiment. By understanding the drivers of gold prices, policymakers can develop more effective economic policies that account for the role of gold in the financial system.

Competitive Advantages and Market Opportunities

The study's findings also have implications for companies and investors seeking to capitalize on market trends. By understanding the complex relationships between gold prices and economic variables, companies can develop more effective hedging strategies and investment portfolios.

For example, investors may be able to capitalize on the threshold effect by investing in gold during times of high inflation or economic stress. Similarly, companies may be able to use gold as a hedge against inflation or other economic risks, by understanding the complex relationships between gold prices and economic variables.

Overall, the study provides a nuanced understanding of the complex relationships between gold prices and inflation, and highlights the importance of considering a range of economic variables when making investment decisions or developing economic policies.

Practical Implications

The findings of this study have significant practical implications for businesses, investors, and policymakers. The results suggest that gold is not a reliable hedge against inflation in the short or long term, but it can be used as a hedge against extreme inflation rates or shocks.

Real-World Applications

• Investors can use gold as a safe-haven asset during times of high inflation or economic stress.
• Companies can develop hedging strategies that take into account the complex relationships between gold prices and economic variables.
• Policymakers can use the findings to inform monetary policy decisions, particularly in times of high inflation or economic stress.

Strategic Implications

• Businesses and investors should not rely solely on gold as a hedge against inflation, but rather consider a diversified portfolio that includes a range of assets.
• Companies should consider the threshold effect when developing hedging strategies, as gold prices tend to react strongly to extreme inflation rates or shocks.
• Policymakers should be aware of the potential for gold prices to react to changes in inflation expectations, and consider this when making monetary policy decisions.

Who Should Care

• Investors seeking to capitalize on market trends and develop effective hedging strategies.
• Companies looking to manage economic risks and develop diversified investment portfolios.
• Policymakers responsible for making informed monetary policy decisions.

Actionable Recommendations

Specific Actions

1. Diversify investment portfolios: Investors should consider a diversified portfolio that includes a range of assets, rather than relying solely on gold as a hedge against inflation.
2. Develop hedging strategies that account for the threshold effect: Companies should consider the threshold effect when developing hedging strategies, as gold prices tend to react strongly to extreme inflation rates or shocks.
3. Monitor inflation expectations: Policymakers and investors should closely monitor inflation expectations, as changes in these expectations can have a significant impact on gold prices.

Implementation Considerations

• Data frequency: The study highlights the importance of considering different data frequencies when analyzing the relationship between gold prices and economic variables.
• Model specification: The results suggest that different models may be more or less effective in capturing the complex relationships between gold prices and economic variables.
• Sub-sample analysis: The study demonstrates the importance of considering sub-sample analysis to capture changes in the relationships between gold prices and economic variables over time.

Conclusion

Main Takeaways

• Gold is not a reliable hedge against inflation in the short or long term.
• Gold can be used as a hedge against extreme inflation rates or shocks.
• The relationship between gold prices and economic variables is complex and influenced by a range of factors.

Final Thoughts

The study provides a nuanced understanding of the complex relationships between gold prices and inflation, and highlights the importance of considering a range of economic variables when making investment decisions or developing economic policies. By understanding these relationships, businesses, investors, and policymakers can develop more effective hedging strategies and investment portfolios, and make more informed decisions.