Is Gold Still an Inflation Hedge?

By Victor Sperandeo and the Curmudgeon


During the last several months and years several professional market commentators have said, “Gold is no longer an inflation hedge.”  We objectively examine those comments and offer a rebuttal in this post.

Characteristics of Inflation Hedges and “Store of Value”:

Scarcity is the reason certain real assets are inflation hedges which stimulates the desire to own those assets. The scarcer the asset, the greater the desire to own it and the higher the demand for those assets.  For example, the Salvador Mundi painting by Leonardo da Vinci sold for $450,000,000 in 2017 - the highest price ever paid for a painting. It’s “one of a kind” by one of the most famous artists in several categories which stimulated the high bidding. 

Gold is primarily a store of value, but it also has industrial uses, mostly in electronics. As it’s a highly efficient conductor (which can carry tiny currents and remain corrosion-free), gold is used in connectors, switch and relay contacts, soldered joints, connecting wires and connection strips.  Gold also has aesthetic value in jewelry, which is very popular in India and China.

In an April 2021 Sperandeo/Curmudgeon: Gold vs. Bitcoin – Which One Will Survive  post we strongly stated that gold is a store of value. We noted that from January 1913 (when the U.S. government official statistics were first published on the CPI) through March 31, 2021, the CPI appreciated 3.07% compounded annually, while gold appreciated 4.17% per year (from $20.67 to $1715.6 an ounce) or +35.8% more per year than the CPI.  A Gold vs CPI update is provided below.

At the current spot gold price of ~$2,000, the yellow metal has appreciated by 16.6% in the last 2 years which was well above the increase in the CPI during the same time period. 

Gold is Money:

Money is a medium of exchange, but it’s also used to store “purchasing power” and wealth in a world of fiat currencies. This is what is referred to as an “inflation hedge.” 

We’ve said in numerous Sperandeo/Curmudgeon posts that gold is money.  That’s because it best fits the necessities of being a medium of exchange, a unit of account, legal tender for debt (yes, the IRS will accept gold as tax payments), a standard of value.  It is also fungible, portable, durable, devisable, and has intrinsic value which is based on the cost of production (i.e., mining), which is currently estimated at $1200+ per ounce before delivery, storage, and insurance.

Gold as a Barbarous Relic?

One of the most famous and renowned economists of all time -John Maynard Keynes- disparaged gold which he called a “Barbarous Relic.” In recent years, the U.S. government, academia, and the media have reported that gold is not relevant in the modern financial system.  Today, many prominent bankers and economists view gold as competition for financial assets they sell or promote.

However, this “Barbarous Relic” is only mined to approximately 1.0% to 1.5% additional supply per year, which makes it scarce. Gold has to be discovered, mined, processed, refined, physically delivered, then stored and insured. Not easy or inexpensive. The cost of all this makes it difficult and expensive, which acts as a floor for gold’s price.

A January 27, 2023 IMF working paper titled, “Gold as International Reserves: A Barbarous Relic No More?” notes that after moving slowly downward for the better part of four decades, central bank gold holdings have risen since the Global Financial Crisis (2008-2009).  Two sets of factors contributed to this trend: First, gold appeals to central bank reserve managers as a safe haven in periods of chaos (economic, financial and geopolitical volatility), when the return on alternative financial assets is low. Second, the imposition of financial sanctions by the United States, United Kingdom, European Union and Japan, the main reserve-issuing economies, is associated with an increase in the share of central bank reserves held in the form of gold.

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The Gold Standard Abandoned:

The gold standard was widely used in the 19th and early part of the 20th century, primarily by those nations whose currencies dominated global finance.  Their gold reserve holdings gave them confidence to back their currencies.

At some point in the 20th century, most nations abandoned the gold standard as the backstop of their monetary system.  The U.S. did so in August 1971, when the demand for switching dollars into gold got out of control.  President Richard Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.

The desire to move to “fiat paper money” is because of the scarcity and limited additional supply of gold. The result has been to print paper money by the U.S. Treasury or the Fed using computer keystrokes to fabricate currency from nothing.


Side Note: The Curmudgeon strongly recommends Jeffrey E. Garten’s book, “Three Days at Camp David  He explains that something had to give in the rigid Bretton Woods structure. Far more dollars were in overseas hands than the United States had gold to redeem them at $35 an ounce. Also, fixed exchange rates failed to reflect the shifts in economic clout brought on by the rapid recovery of Japan and Western Europe.  It was astonishing to read that Paul Volker -the best Federal Reserve Chairman of all time (by far) - played an important role in that decision.  Volker, then an official at the U.S. Treasury Department, firmly recommended in 1971 that Nixon remove the U.S. from the gold standard.  Volcker and others insisted that “maintaining the dollar’s peg to the price of gold was an untenable policy.”


Gold vs the CPI:

·        From 1914 to date the CPI grew at 3.17% while gold increased at 4.27% (using spot Gold futures as the last price). It’s important to note that during much of that time period (through 1973) the gold price was fixed from $20.67 to 42.22 per ounce.

·        From January 1970 to April 2023, the CPI grew at a compounded annual rate of 4.04%, while gold increased at a compounded rate of 8.07%.  In other words, gold increased at twice the rate of the CPI during that time period.

Victor strongly believes the CPI does not accurately measure inflation and is not closely correlated with the gold price (please see our Conclusions below).

Recent Gold Performance vs Major Currencies:

Gold returns were mixed in April, consolidating just below all-time highs in U.S. dollars.

Gold price and return in different periods across key currencies: *


USD (oz)

EUR (oz)

JPY (g)

GBP (oz)

CAD (oz)

CHF (oz)

INR (10g)

RMB (g)

TRY (oz)

AUD (oz)

28 April 2023 price











April return











Y-t-d Return











*Data to 28 April 2023. Based on the LBMA Gold Price PM in local currencies.

Source: Bloomberg, ICE Benchmark Administration, World Gold Council


Cartoon of the Week:


Gold is an inflation hedge and also a hedge against global chaos (as per the IMF paper).  Gold is also a hedge against a stock market decline. Historically, gold has gone up during most sharp equity sell-offs but the magnitude varies: gold’s performance leading up to the sell-off and the prevailing level of real yields appear to be key.

Demand for gold from investors, central banks, jewelers, and tech companies is also growing. According to the World Gold Council, global gold demand increased 28% year over year in Q3 of 2022.

Global central bank purchases leapt to almost 400t in Q3 (+115% quarter over quarter). This is the largest single quarter of demand from this sector in our records back to 2000 and almost double the previous record of 241t in Q3 2018. It also marks the eighth consecutive quarter of net purchases and lifts the y-t-d total to 673t, higher than any other full year total since 1967.

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However, gold is NOT hedging the bureaucrats “Frankenstein creation” of the CPI – a metric which does not accurately measure inflation (as we’ve pointed out in so many previous Curmudgeon posts).  The CPI is not an actual measure of real price movements. It completely distorts prices for political purposes! Nonetheless, we’ve shown that gold has outperformed the CPI over extended time periods.


A Brief History of Gold and the U.S. Dollar’s Relationship

Investment Update - Beyond CPI: Gold as a strategic inflation hedge

Gold as International Reserves: A Barbarous Relic No More?

World Gold Council

End Quote:

“Gold is still the ultimate store of wealth. It's the world's only true money. And there isn't much of it to go around. All of it ever mined would fit into a small building - a 56-foot cube. The annual world production would fit into a 14-foot cube, roughly the size of an ordinary living room. If each Chinese citizen were to buy just one ounce, it would take up the annual supply for the next 200 years.”  --Mark Nestmann, "How To Achieve Personal And Financial Privacy In A Public Age”

Be well, stay healthy, wishing you peace of mind. Till next time…...

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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