Inflation – Is Gold More Speculation Than Investment Protection?

Kimberly Watson, Editor in Chief
September 07, 2012 /

The official inflation rate is stated to be two or three percent, but to the average person, this rate is not reflected in their everyday cost of living. For investors the benefits associated with gold & investment mean that they only gain if the market dictates that they can sell at a better price than they paid. Gold does not generate an income! Therefore, because of the market fluctuations created by supply and demand, purchasing gold could be regarded as more speculation than an investment. It also raises the issue of whether the metal is a protection against inflation!

Various commodities such as foreign currencies and gold are frequently regarded as hedges against inflation. However, when related to gold & investment it should be realized that a single asset category, does not provide effective protection for every future inflationary situation.  Although the protection of investments from the affects of inflation is advisable, caution should be exercised in the knowledge that inflation prospects for the future are unpredictable.

The complexity and increased posed by gold & investment and other perceived assets entails the offsetting of their potential protection against inflation, for investors, other than those highly experienced. Therefore, the average investor remains with stocks and “TIPS”, Treasury Inflation Protected Securities. In mild inflationary periods, stocks are inclined towards a reasonable performance, due in part to the risk investors are willing to take for higher returns. Within most portfolios, stocks perform an important role with a history of being the main drivers for investment returns However; a higher inflation rate could cause severe damage to stockholders.

The power of “TIPS” is recognized by their preserving a purchasing influence in a portfolio, particularly during high inflationary periods. Variations in the Consumer Price Index (CPI), dictate the raises and falls of these bonds, as opposed to gold & investment. Due to the sensitivity of TIPS relative to the CPI, they are regarded, arguably as the primary most versatile inflation hedge relative to the various inflationary conditions.

Food and energy are excluded in the inflation statistic called “core inflation”. This is due to the factor of price volatility related to these commodities and their being rapidly affected by weather or political unrest. The definition poses a problem for a variety of people as these types of expenditure characterize a highly significant part of a family budget. This is aggravated by their hands-on perception that the cost of living related to their circumstances, is rising at a greater rate than that shown by the government!


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