In the past six months, inflation has become much more of a concern for Americans. In February, record inflation was observed with the CPI indicating a 7.9% increase year over year, a number not seen in 40 years. Obviously, inflation makes everyone nervous, but it especially makes investors nervous. We do not know if this period of inflation will be short lived or longer term, but in the meantime, the price of gold is rising. Does the relationship between inflation and gold prices tell us anything? 

Inflation and Gold Prices

In the past few months, the price of gold has increased - briefly hitting $2,070 an ounce - but it has also experienced some volatility with announcements by the Federal Reserve about interest rates and the war in Ukraine and sanctions against Russia both escalating. Obviously, there’s more going on than just inflation, but in insecure times people tend to look to gold as a hedge or a safe haven. 

Historically, changes in the CPI and gold returns have been only weakly linked. People remember the high inflation rates and the high price of gold in the 1970s but have ignored that inflation, when it has occurred since then, has not always pushed the price of gold higher. Outside of the U.S. investors often buy gold as a hedge against inflation, but many countries have experienced very high inflation, even hyperinflation. That has not been the case here.

Wealth managers will often recommend other strategies, such as investing in commodities or REITS, to protect investors, but if inflation lasts over time, gold and other precious metals can be a good investment strategy:

“In the long term, gold serves as a strong strategic component in many portfolios, not only for its diversification benefits but also for its returns. The relationship gold is shown to have with money supply demonstrates, perhaps, that the strong returns we have experienced since 1971 are not aberrant. Gold’s ability to protect against more than increases in the general price level suggests that its long-term real returns should be positive – something current long-term portfolios may struggle to achieve.” 

Grand Rapids Coins endorses the philosophy of investing 5%-10% of one’s total assets in physical gold and silver as a hedge against the unpredictable. However, it’s important to be careful when purchasing precious metals. High bullion prices bring out the sharks. Do your research about coins and bullion and especially about individual coin dealers. 

To avoid being taken advantage of, you should know the background of your coin dealer, how long they’ve been buying and selling coins and bullion, and their Better Business Bureau (BBB) ratings. Buy gold only through a reputable dealer. 

Is Gold a Safe Haven?

Remember: gold fluctuates in value, and so do gold coins. Nothing is ever guaranteed to increase in value or be a safe haven that will protect you from any economic storm. We love coins. We are always happy to talk to coin collectors about our experience, our ratings, and how we do business. It’s our job to know value and recognize authenticity, and we want that for our coin clients as well. If you are interested in investing in coins or bullion as a hedge, we are here to help.