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Dealing with Inflation: Is it the Right Time to Buy Gold?

Updated: Jan 26, 2023

Background ☢️

On Friday, December 10, the Labor Department reported that inflation had surged by 6.8% in November. During the month, the Consumer Price Index (CPI) rose by 0.8%. With its 6.8% year-on-year increase, the index has now cemented the record as fastest growing since June 1982. Minus food and energy prices, the core CPI was also up 0.5% for the month – its highest in 30 years. Gasoline alone is up over 50%.

US Inflation chart

US Inflation Chart, November 10, 2021.

Thus, contrary to the Fed’s claim that the inflationary pressure is only “transitory,” its effects continue to be hard and prolonged, felt most especially by low-income workers. Inflation is bad for your savings. However, if you know how to harness it, it can be really good for investments. So, what should you buy?

Gold 🏆

Gold Inflation

Investment experts are divided on the utility of gold. While some see it as a relic of antiquity useful only for jewelry, with no monetary properties, others still see it as a viable store of value for an investment.

No matter what, a fact is undeniable: gold is a store of wealth. Even several central banks have its reserves. When the USD is declining and inflation is rising, gold is surely your hedge.

Now, besides holding physical gold, you can weather the storm of inflation by owning other investment options that are underpinned by gold. Examples are ETFs such as:

· GraniteShares Gold Trust (BAR)

· SPDR Gold Trust (GLD)

· iShares Gold Trust (IAU)

· Goldman Sachs Physical Gold ETF (AAAU)


Bitcoin Inflation

If your risk appetite is high, then you might consider using Bitcoin to preserve your dollars whose value is currently falling at the fastest rate in 30 years.

Of course, you can hedge against inflation with gold, but you can do the same even better with Bitcoin, the digital gold.

Although more volatile, Bitcoin has returned more than gold and stocks over the last decade. From October 2011 to October 2021, gold returned 8.25% and the S&P 500, 281%. Bitcoin, however, generated a whopping 1,135,943%.

Bitcoin is highly desirable as an inflation hedge for many reasons. Besides its phenomenal growth compared to other financial instruments, its supply is limited. The only disadvantage, however, is its wild fluctuations in price.

Stocks 📈

Stock Market Inflation

The stock market actually reacted positively to the negative November inflation report.

While bonds yielded lower, stock indices trended up, with the S&P 500 rising 0.95% to 4,712.02 – a record. The Dow also gained 216.30 points. These suggest the market had priced in an expectation of higher inflation figures. Thus, investing in stocks amidst this inflationary pressure might also be a not bad idea.

Gold vs Stocks Inflation

Gold vs. Stock (1801 –2011) Source: The Millionaire Teacher, pg. 149)

If you had invested $1 in gold in 1801, you would have had just $73 in 2011.

Interestingly, $1 invested in the stock market in 1801 would have been worth $10.15 million in 2011.

In fact, during inflation, if you have to pick between gold and stocks, pick stocks. A portfolio of 60/40 split across the following stock and bond indexes could do:

· Vanguard Total U.S. Stock Market Index (VTSMX)

· Vanguard U.S. Bond Index (VBMFX)

Hope this was useful for you! Please note that the above content is not an investment advise and shall be considered only for informative purpose.

Feel free to share you comments below.



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