Gold as an Inflation Hedge 

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According to statistics from Ned Davis Research, gold has climbed by 5.7 percent each year on average since the late 1960s. That performance outperforms inflation, which is why many people invest in gold as an inflation hedge.

Gold, on the other hand, has gone through periods when it has not kept up with inflation. On an inflation-adjusted basis, an investor who purchased gold in 1980, when it was selling for close to $1,900 per ounce in today's currency, has lost money.

The issue with gold as an inflation hedge is that its rewards are unpredictable. Gold outperforms inflation in certain years and underperforms inflation in others.

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In a study titled The Gold Dilemma, Claude B. Erb and Campell R. Harvey investigated the historical performance of gold as an inflation hedge. “If gold were a perfect short-term inflation hedge, its actual price should be stable and display no real price variations,” they found.

In 1980, a Brazilian investor acquired gold as an inflation hedge, according to Erb and Harvey. Brazil's yearly inflation rate averaged over 250 percent during the following 20 years.

What was gold's return at the time? According to the Brazilian Real, gold has lost 70% of its value in real terms. Holding currency denominated in the Brazilian Real, which lost almost all of its value, fared better than gold. Even yet, since 1980 was a cyclical high for gold, gold was not an excellent inflation hedge.

“If gold were a perfect short-term inflation hedge, the actual price of gold should be constant and have no real price variations,” says the author. — Campbell R. Harvey and Claude B. Erb
TIPS and Series I Savings bonds, for example, are significantly superior inflation hedges since their performance is directly linked to inflation. This comprehensive tutorial will teach you all you need to know about investing in inflation-indexed bonds.

In this tutorial, you may also understand what causes inflation and how to defend yourself from it.

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