A common claim from precious metals aficionados and dealers is that gold and silver act as a hedge against inflation. We have certainly made that claim ourselves several times over the years.

However, the historical data says that claim is not as clear-cut as we thought. Broadly, yes – gold and silver’s status as inflation hedges is secure and earned. But, in the interest of transparency and accuracy, let’s take a look at the more nuanced picture the historical data reveals.

What “Inflation Hedge” Means (and Why Gold/Silver Qualify)

First of all, let’s break down what an inflation hedge is. An inflation hedge is an investment or strategy that allows a portfolio to maintain its purchasing power in the face of devaluing currency.

Although there are many ways a currency can devalue, the most common way is through deliberate debasement of it on the part of its issuing government. In times past, such as in the Roman Empire, the powers that be accomplished this task by including less gold in the composition of the currency itself.

Modern governments take things a step further. Since no major currency is metal-inclusive or directly tied to an amount of gold or silver, it is possible simply to “make” more money by printing more of it. In this regard, the supply of fiat currency is limited only by the capabilities of the printing presses.

So, gold and silver are candidates as inflation hedges because their supply is relatively inelastic, more or less. In other words, there is no way to flood the market with gold or silver unless a physical discovery of size occurs.

Gold and silver also tend to keep their purchasing power intact because they are tangible assets and do not rely on a government or currency system to provide value. Both metals have been recognized as objects of value for thousands of years and across all civilizations.

The issue

Everything above is the theory behind gold and silver acting as hedges against inflation. There’s nothing wrong or inaccurate about the reasoning behind it.

The tension, however, lies within the messiness of the actual track record and history of the two metals’ values in times of heavy inflation. Let’s look at how the two have performed in recent years.

Three Eras of Data

Sources: World Gold Council, Macrotrends, U.S. Bureau of Labor Statistics

Prior to 1971, the consumer price index and the prices of gold and silver stayed relatively stable. The CPI appeared stable in indexed terms (though inflation was still taking place), and the prices of gold and silver was literally a matter of statute.

However, after President Nixon ended the Bretton Woods system and finally severed the gold standard in 1971, both inflation and the CPI began to climb. The federal government was now free to print as much fiat currency as it liked, and purchasing power began to erode dramatically.

Roughly concurrently, the US Mint stopped including silver as part of American coinage. Thus, there was no more connection between the value of silver and the value of the dollar.

So, we see a reliable trend appear in the CPI graph since 1971. It has risen steadily – a fact that most of us understand already based upon the rising costs of buying products and services each year.

Against this trend, there is quite a bit of observable volatility in the prices of both gold and silver. We can break these rises and falls into three distinct periods since the end of Bretton Woods/silver in coinage.

• 1971 – 1980: Both gold and silver spiked significantly, and their percentage changes in price outpace the percentage change in the CPI. Thus, the adage about gold and silver providing a hedge against inflation was borne out during this period.
• 1981 – 2002: The CPI continued to rise steadily during this period, but the same could not be said about gold and silver. Both precious metals saw their values decline and/or stagnate during the last two decades of the 20th century. So, they actually failed to serve as adequate hedges against inflation during this period.
• 2003 – present: Broadly speaking, gold and silver resumed their status as hedging vehicles – particularly during periods of high inflation and CPI gain. So, gold and, to a lesser extent, silver were excellent hedges during the quantitative easing around 2011, the economic stimuli associated with COVID-19 in 2020, and the high inflation of 2023 and 2024. However, the results otherwise weren’t so clear-cut. There were times when the prices of both metals declined – even as inflation continued its steady upward trend.

The Real Driver: Real Interest Rates

Based on the graph above, it’s clear that the relationship between the CPI/inflation and the prices of gold and silver isn’t automatic. As it turns out, there is another factor at work. Instead, it’s the real interest rates – the rate left after subtracting the inflation rate from the nominal rate.

When real rates fall and/or become negative, that’s when gold and silver perform well because the true returns on investments are increasingly not worth the risk. As a result, investors turn to precious metals more often to stabilize their portfolios and ride out the storm.

Conversely, rising or positive real rates mean that traditional investment classes like stocks and bonds are still profitable investments. So, even if there’s a period of high inflation, it may not cause a run to gold if the real interest rates remain healthy.

Thus, it’s much easier to contextualize the three eras described above. Gold and silver increased their value when real rates fell or were negative, but decreased when real rates rose or were positive.

Gold vs. Silver

Now, if you’re wondering whether there’s any difference between gold and silver’s performances as hedging assets – there is. Because gold and silver are used in such different ways and have such different values, they have a different application with respect to hedging against inflation.

Gold is the steadier of the two metals in terms of hedging potential because of its lower volatility. Silver’s demand is heavily influenced by its usefulness to industry, and its lower trade volume leads to a more volatile price point.

The decision about which to use or how to assign weight to your investments boils down to what matters the most to you. If you’re just wanting to hold fast against currency devaluation, gold likely offers more stability. However, if you can handle some movement in value, silver might give you the opportunity for some upside in the investment due to its volatility.

Takeaways

The main thing to take from the data is that gold and silver can act as hedges against inflation in the long-term, but the results will be mixed in the short-term. Depending on your timing, you may end up hedging with precious metals, or you may see more of a toss-up situation.

So, the most reliable reason to buy gold or silver remains the opportunity to diversify your portfolio. The tangible stability of precious metals overrides any kind of short-term advantage you can hope to pick up from gold and silver’s hedging potential.