Are Silver and Gold an Inflation Hedge?

hedge against inflation

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Between 2012 and 2020, the annual inflation rate in the United States remained fairly consistent, rarely rising much higher than 2% each year.

But this ratio of gold has skyrocketed since 2021, leading many to wonder if they can utilize a gold inflation hedge.

In this article, I’ll explore whether precious metal (like silver and gold) is an efficient hedge against inflation, allowing you to make an informed decision about whether to invest in assets like gold ETFs and SPDR gold shares.

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Silver & Gold as Inflation Hedges

It’s common knowledge that silver and gold are valuable materials, but can you use them to hedge against inflation? To answer this question, it’s crucial to understand what contributes to the value of these metals.

Generally, silver and gold are valuable due to their:

  • Scarcity, and
  • Uses

Unlike iron, one of the most common metals, precious metals like gold and silver are only available in finite, exceptionally limited quantities.

They’re also used in various industries, with gold being notably valuable due to its conductivity and resistance to corrosion.

Consequently, the value of most precious metals increases over time. However, the value of silver is far more volatile (less stable) than the value of gold.

The value of gold has only seen occasional decreases over the last century. It’s also enjoyed a much higher value than other precious metals.

The consumer price per ounce in 2020 consistently hovered around the $2,000 mark.

Gold is a far better and more effective hedge against inflation than silver. After all, its value is higher and more stable than silver. However, both are valuable assets that can help you diversify your portfolio.

Still—what drives the gold price ever upwards?

What Drives The Price of Gold in the World?

Tracking financial markets and currency exchange rates can help you gain a better grasp of how current events (economic and political) impact the world’s economies.

But the vitality of the stock market doesn’t influence gold’s value nearly as much as that of fiat currency. Fiat currency (also called fiat money) is the traditional paper money supplied by a nation’s government or financial institutions.

The value of this currency is influenced by a variety of factors, the most significant being:

  • A country’s debts
  • The available supply of fiat currency
  • The economic power of the supplying nation

But though physical gold and silver don’t support fiat currency, one of the most significant factors impacting the value of fiat money also impacts gold’s value—supply and demand.

There are approximately 244,000 tons of gold on this planet (that we’ve unearthed thus far), which might seem like a considerable supply.

But when you compare this amount to the amount of crude iron ore available (an estimated 800 billion tons), it’s immediately evident that gold is a rare resource.

More than any other factor, the law of supply and demand influences gold’s value. As demand for this precious metal increases, the value will continue to rise, as the supply of gold is significantly limited.

Gold vs. U.S. Treasuries: What’s a Better Hedge?

Building a strong investment portfolio doesn’t happen overnight, but inflation rates can rise at an alarming pace, quickly outpacing the value of your assets. 

Because the value of gold rises slowly, typically over several decades (or even centuries), you may wonder if this physical asset is the best hedge against investment.

After all, other investments, like securities purchased from the U.S. Department of the Treasury, are often lauded as worthwhile hedges.

Bonds acquired from the U.S. Department of the Treasury increase in value at a fixed rate. This rate varies depending on the precise bond.

For example, Series EE savings bonds enjoy a monthly value boost, making them a more profitable short-term gold inflation hedge or silver inflation hedge.

However, these securities (often called treasuries) have a limited lifespan. On the other hand, gold is an asset not limited by a set timespan, making it an excellent long-run relationship.

Understanding the best time to buy gold can impact the positive net impact of acquiring gold assets.

The bottom line is that precious metals like gold are an effective inflation hedge over the long run, but bonds from the U.S. Department of the Treasury might be the smarter short-run relationship.

Summary

Precious metals can be an asset that helps hedge against inflation, though gold is a far more reliable choice than more temperamental metals like silver.

Gold’s critical values remains constant or increases over time, unlike fiat currency, as it’s a limited and intrinsically valuable resource.

Generally, a gold inflation hedge is stable and long-term. However, those seeking more short-term solutions may want to consider investing in bonds and securities available via the U.S. Department of the Treasury.

Still, investing in physical assets, like precious metals, could be a wise long-term answer to inflation and a reliable way to achieve portfolio diversification. Therefore, it’s best to act now and invest in these precious metals today!

FAQ’s

Understanding whether silver and gold are worthwhile assets that can help hedge against inflation can quickly get complicated.

Be sure to review these frequently asked questions to learn more.

The value of gold can remain constant or only increase slightly during periods of inflation. That’s because, unlike fiat currency (paper money), precious metals like gold have intrinsic value.

Gold could be an excellent inflation hedge, but it’s not a short-term answer to inflation. For that reason, gold investors should not expect their newly acquired gold assets to generate immediate profits or protection against inflation.

For U.S. investors, treasury inflation-protected securities (TIPS) may be the best short-term inflation hedge.

However, precious metals are often a reliable long-term option, and because they’re not tied to government agencies, they’re far more malleable in terms of usage.

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