Gold’s Role in Countering Inflation
As fears of inflation rising spreads across major economies, investors should be cautious to ensure that the right asset class is a component of their portfolio to offset inflationary pressures.
Gold is such an asset that provides a directly proportional hedge to inflation.
There are many obvious reasons for this.
Firstly, currency rate fluctuations do not affect the gold price. The effects of inflation are minimal. When fiat currencies loses its purchasing power, gold prices in those currency units tend to rise.
Secondly, rising inflation leads to lower interest rates. A nation’s monetary policy is then more accommodating in maintaining monetary stimulus and supporting low interest rates, which in turn provides support to gold to help beat inflation.
Thirdly, gold has proven that it is the ultimate safe haven asset that is a long term store of value. This can be seen over decades. One such interesting statistic is that gold has returned more than 10% CAGR since 1971. Gold has outperformed all asset classes ranging from bonds to stocks, developed market equities to major commodities.
It is wise to hold some 5-10% of gold as part of a diversified portfolio to combat inflation.
Own some gold through ETFs, Digital Gold and Physically Gold Backed Cryptocurrencies.