Is gold a safe way to protect yourself against inflation?

Economic news has been a rollercoaster ride for the better part of the decade. First, the pandemic sent prices soaring, then Bidenomics dumped money into the economy, and recently, the war in Iran has sent gas prices through the roof.

Inflation in the U.S. went from about 1.78% per year from 2010 to 2019 to 4.1% from 2020 to today. You don’t need an expert to tell you that inflation makes your money worth less, which is particularly hard for people on fixed incomes and savers with money in bonds and bank accounts.

Fortunately, there is an answer. Gold has been a store of value since time immemorial. In Ancient Egypt, gold was an essential element of trade and commerce, and was revered as a representation of the sun’s radiant power, the source of the king’s authority.

Today, gold is widely perceived as a hedge against long-term inflation. According to Luciano Duque, CEO at C3 Bullion, “In a high-debt, high-deficit environment, the case for trimming bonds to fund a 5 to 10% gold allocation is stronger than it has been in forty years.”

A gold IRA is a modern way to access gold’s eternal value

Storing gold in your home safe is almost as old-fashioned as keeping money in the mattress. Gold IRAs are a tax-advantaged, modern way to protect your assets with gold’s enduring and eternal value.

An experienced gold IRA provider like Lear Capital does all the work of setting up your IRA, providing you with IRS-compliant, high-quality gold, a trusted custodian and secure storage. There are many companies that offer access to gold IRAs, and our guide to getting started as a gold investor is a good place to start your journey.

Is gold a safe way to protect yourself against inflation?

Inflation is a tax on savers and a way for governments to inflate away their debts. It’s a “hidden tax” that erodes your purchasing power and devalues your dollars.

According to the Nobel Prize-winning economist Milton Friedman, inflation is “always and everywhere a monetary phenomenon.” Since the U.S. went off the gold standard, the government is in complete control of the money supply. The Treasury and the Federal Reserve Bank control the amount of money in circulation by printing money and setting interest rates.

In the short term, supply shocks can increase prices, but over the long term, the government is responsible for sustained inflation by increasing the money supply faster than the growth of economic output.

For gold investors, the question is, do you trust the government to reduce the money supply and risk a politically damaging recession just to keep prices from rising? Your allocation of gold to your gold IRA will likely depend on the answer to that question.

Unlike the U.S. dollar, which is called a “fiat currency” because its value depends on public trust in the government, gold is a hard asset with intrinsic value and a long history of serving as a safe-haven investment during times of economic uncertainty.

According to John Ohanesian, President and CEO of Lear Capital, “Gold is more likely to help when inflation comes with negative real interest rates, currency weakness or doubts about the government’s ability to preserve purchasing power. In other words, gold tends to hedge a loss of confidence in money better than it hedges every short-term rise in consumer prices.”

Gold is a crucial component of an inflation-protected investment portfolio because unlike fiat currency, which governments can print in unlimited quantities, the amount of gold is finite. As the dollar loses value, the nominal price of gold in dollars tends to rise, which in the long term protects your savings from inflation.

But it’s important to keep in mind that gold isn’t necessarily a safe short-term hedge against inflation.

The arguments presented here are based on the idea that the government can create an economic and fiscal crisis through self-dealing and inaction. In a crisis, gold is an excellent hedge against uncertainty, but in a world where institutions recover and start to function properly — a world where 2% inflation is not only normal but desirable — gold’s value will fluctuate above and below its nominal value in dollars like most other commodities.

Diversification in your portfolio includes diversity of precious metals

No one knows what the future holds, which is why you build a defensive portfolio in the first place.

John Templeton, a legendary investor widely regarded as one of the 20th century’s greatest global stock pickers, thought diversification was a necessity because “we should be humble enough to admit we can be wrong.”

Unless you think the world is about to fall apart, it would be foolish to totally divest yourself from stocks. Adam Bergman, the founder of IRA Financial, says, “By keeping gold to a modest 5–10% allocation, you treat it as a non-correlated safety net rather than a primary growth vehicle. Ultimately, you sacrifice [your bank deposit or bond’s] guaranteed yield to gain protection against ‘tail-risk’ scenarios where cash or bonds lose real purchasing power.”

Even within your self-directed IRA, you may want to diversify your holdings away from 100% gold to a mix of gold, silver, palladium and other precious metals. Lear Capital’s real-time pricing tools can help investors shopping for metals to see current spot prices from a desktop or on your phone.

Owning precious metals is a long-term investment

Owning gold and silver in a tax-advantaged account protects your wealth against income taxes today and the indirect tax of inflation in the years and decades to come.

Gold serves as a historically resilient, long-term hedge against inflation, allowing investors to diversify portfolios and protect against the erosion of fiat currency purchasing power. 

By allocating a modest portion of a retirement portfolio to gold through a specialized provider like Lear Capital, investors can secure a non-correlated safety net against economic uncertainty.

FAQs

Why should I have gold in my portfolio?

Adding gold to a portfolio primarily serves to diversify holdings beyond stocks and bonds. Some buyers believe gold is a hedge against inflation and currency devaluation. In some cases it may also mitigate risk during market volatility.

What is the 80/50 rule for gold?

expresses how much one ounce of gold buys in ounces of silver. For example, at 100:1 ratio, one ounce of gold buys 100 ounces of silver. The theory says when the ratio is 80:1 or greater, investors should sell gold to purchase silver, and when the ratio is less than 50:1 sell silver to purchase gold, in the expectation that the ratio will revert to the mean. 

What metal is 30 times rarer than gold?

Platinum is generally considered to be 30 times rarer than gold. While gold is often considered the most precious metal, platinum is significantly scarcer in the Earth’s crust and in total amount mined throughout history, with over 60% of it produced in South Africa.