Gold can act as a hedge against inflation, but it doesn’t reliably rise whenever inflation does. Some investors use gold to help preserve purchasing power as prices rise, but inflation is only one of several factors that can influence gold prices.
If you’ve researched gold as an investment, you’ve probably come across financial experts asserting that gold is a hedge against inflation. Understanding what that actually means — and what it doesn’t — can help put gold’s role in an investment portfolio into perspective.
Tips on Buying Precious Metals
- Portfolio diversification and stability: Gold often holds its value or rises when stock and other asset prices fall. When inflation rises or the dollar falls gold’s price stability offsets a weaker dollar and market volatility.
- Potential tax advantages with a gold IRA: Eligible precious metals held in an IRA receive the same tax treatment as other IRA investments. With a traditional IRA, investment gains generally aren’t taxed while they remain in the account; taxable distributions are generally subject to ordinary income tax. Qualified Roth IRA distributions may be tax-free.
- Gold can be relatively liquid: Gold is generally easier to buy and sell than less-liquid physical assets such as real estate or collectibles. How quickly you can sell and the price you receive depend on the type of gold, dealer, and market conditions.
What’s an inflation hedge?
An inflation hedge is an investment or strategy intended to help offset the loss of purchasing power caused by rising prices.
As inflation rises, each dollar buys a little less than it did before. For example, imagine a cart of groceries that costs $100 today. If those same groceries cost $105 next year, your $100 no longer buys as much as it did before.
A hedge doesn’t prevent inflation or guarantee a particular investment outcome. Instead, it aims to offset some of that loss of purchasing power over time.
Gold is one asset some investors use for that purpose. But whether it actually succeeds as an inflation hedge depends on what else is happening in the economy.
Why is gold associated with inflation?
Gold is associated with inflation partly because its supply isn’t controlled by governments or central banks, and investors have historically viewed it as a way to preserve purchasing power.
Gold occupies an unusual place in the global economy. It’s both a commodity — a basic raw material bought and sold in standardized form — and an investment some people own to help safeguard purchasing power over time. Unlike paper currency, gold can’t simply be created through government or central bank policy.
Those characteristics help explain why discussions about gold often turn to inflation. Over long periods, many investors have viewed gold as an asset that may help retain purchasing power as the prices of goods and services rise.
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Source: finance.yahoo.com
