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I am looking to use gold as an inflation hedge, however this article suggests it is not as good as one might believe. One thing I don't understand is that the inflation adjusted price is higher then the nominal. What is that about? The real price should be lower as we subtract inflation from nominal.

Furthermore I think it is kind of odd this uses pre 70 data to consider gold as inflation hedge since there was no price discovery in this period. What is your take on that?

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    Gold performed well during the rampant inflation of the 70's early 80's. Outside of that period, gold has performed poorly as an inflation hedge. A more reliable hedge would be Treasury Inflation-Protected Securities (TIPS). – Bob Baerker May 30 at 17:23
  • @BobBaerker you mean over longer periods of modest inflation it does not act as a hedge? while during wild periods such as market turmoil or rampant inflation it historically has worked? And works as a hedge on any risky asset – user1 May 30 at 17:26
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the inflation adjusted price is higher then the nominal, what is that about?

With inflation, prices get higher over time. So $50 in 1970 is the equivalent of, say, $500 today (I'm not using exact inflation stats, just illustrating the point). So if you adjust past "nominal" gold prices to today's dollar-equivalent price, the price would be higher.

But let's think about what an "inflation hedge" means. What it means is that when inflation is high, the price of your asset rises to account for the loss in value of the currency. When inflation is low, The price still rises, but not as much. When there is deflation, the price would go down (offsetting the increase in value of the currency). This has not been the case with gold prices historically. If it were, the "inflation-adjusted" price would be relatively flat. But it spikes and dips just like the nominal price.

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It should be obvious from the graph in the article. A good hedge* should be something you can sell for at least the same price as you paid for it, whenever you need the money, no? But it's obvious from that graph that gold doesn't even come close to holding a constant inflation-adjusted price. It is subject to quite wild swings, from over $2000/oz (in 2018 dollars) in 1979-80 to under $500/oz around 2002, then up to $1800/oz around 2012, down to $1200/oz in 2015 to $1728 today... So if you bought your inflation hedge gold in 2012 and needed to sell it in 2015, you lost a third of your investment.

Then of course gold doesn't earn dividends or experience corporate growth, it just sits there. Worst case, you have to pay for storing it securely :-(

*As opposed to buying it as an investment, where you can choose when you sell.

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    A good hedge is NOT "something you can sell for at least the same price as you paid for it, whenever you need the money." A good hedge is something that performs well when the underlying that you are hedging performs poorly. "So if you bought your inflation hedge gold in 2012 and needed to sell it in 2015, you lost a third of your investment." If losing 1/3 of your investment is a bad thing then the stock market isn't a good investment either since it lost 40+ pct in the 1987 drop, 50 pct in the 2000 and 2008 drops and 35% this March. – Bob Baerker May 30 at 17:10
  • @Bob Baerker: 1) That's what I said, isn't it? 2) Did I ever claim that investing in the stock market was a good hedge against inflation? – jamesqf May 31 at 3:41
  • A good hedge should be something you can sell for at least the same price as you paid for it, whenever you need the money, no? You got one word correct in your statement. It's the word NO . – Bob Baerker Jun 29 at 17:10
  • Think about it this way - you should be okay with a hedge losing money since it means that what you're hedging against made money. – D Stanley Jun 29 at 17:24
  • "Something you can sell for at least the same price you paid for it" would seem to be the descriptor of a "store of value" investopedia.com/terms/s/storeofvalue.asp – user662852 Jun 29 at 20:32

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