Gold and Inflation: Why Gold is Considered an Inflation Hedge

Gold is considered an inflation hedge because its value usually remains steady even as the currency’s purchasing power declines. When the cost of living rises and the value of your savings declines, gold serves as a reliable store of wealth because of its limited supply and universal acceptance. This blog explains the reasons for gold inflation and how gold helps protect your wealth during inflation.

Factors Influencing Gold Prices

Here are a few factors that influence the price of gold in the gold market: 

• Gold prices are influenced by supply and demand dynamics, with central banks and investor sentiment playing a significant role.
• The money supply and interest rates also impact gold prices, with higher interest rates often leading to lower gold prices.
• Economic uncertainty, such as during the European sovereign debt crisis, can drive up gold prices as investors seek safe-haven assets.
• The World Gold Council reports that factors such as jewellery, coins, and bars drive gold demand.
• Gold production and recycling also affect gold prices, with changes in supply driving market movements.

Why Gold is Considered an Inflation Hedge

The primary reason gold is valued during inflationary periods is its ability to serve as a stable financial asset when the value of paper currencies falls. Several core factors contribute to its reputation as a hedge against inflation:

Gold’s Ability to Preserve Purchasing Power

Gold can help preserve purchasing power because its price often rises as the cost of goods and services increases. Historically, many periods of higher inflation have aligned with stronger gold prices, as investors use gold to protect value. As recently as October 2025, Reuters reported a 1% increase in gold prices amid geopolitical risks and ahead of U.S. inflation data.

Also Read: 10 Factors That Influence Gold Prices in India: Complete Analysis

Gold’s Limited Availability Versus an Expanding Currency Supply

Gold’s supply grows slowly through mining and recycling, which limits how quickly new supply can enter the market. In contrast, currency supply can expand over time as part of monetary policy measures taken by the RBI. The natural scarcity means gold cannot be devalued by sudden increases in supply. This contrasts sharply with the expansion of the money supply, which can lead to currency devaluation and higher inflation rates.

Gold’s Response to Economic Uncertainty

During periods of economic uncertainty or geopolitical tensions, for example, changing policies in the US or the conflict in the Middle East, gold prices tend to increase. This is because investors’ sentiment towards safety drives up gold demand and, consequently, its price.

Gold’s value isn’t dependent on any one government’s policies, making it a safe way to store wealth when confidence in paper money or other investments drops.

Also Read: How Gold Purity is Tested: Methods Used by Banks and Gold Loan Companies

Universal Value and Liquidity

Gold is recognised and valued globally, making it a liquid asset that can be easily bought or sold in any country. In India, you can convert physical gold into cash with relative ease through jewellers and financial institutions.

Furthermore, gold carries no counterparty risk. Unlike stocks or bonds, its value does not depend on an institution’s ability to fulfil its obligations, offering a secure alternative for wealth preservation.

Gold as a Portfolio Diversifier

Gold often behaves differently from stocks and bonds, making it an excellent tool for portfolio diversification. When financial markets are volatile, the gold price may move in the opposite direction to other assets, helping to reduce overall portfolio risk. Financial experts often suggest an asset allocation of 5-15% in gold to create a balanced and resilient investment portfolio.

Also Read: Gold in Indian Weddings: Traditional Requirements and Modern Alternatives

To Conclude

Gold and inflation have a complex relationship, with gold often serving as a hedge against inflation. Understanding the factors that influence gold prices, including supply and demand dynamics and economic uncertainty, is crucial for investors. Investing in gold can serve as a safe-haven asset and help preserve wealth during times of crisis. Various factors, including central banks, inflation rates, and consumer demand, influence the gold market.

If you own gold and need urgent funds, you can get a Gold Loan from Poonawalla Fincorp with quick approval, fast disbursal, and minimal documentation.

FAQs

Does gold beat inflation in India?

Yes, gold has historically outpaced inflation in India, with local gold prices rising during periods of inflation. As inflation impacts currency value, demand for this precious metal increases, making it a strong inflation hedge in the Indian market.

How much gold should you hold as an inflation hedge?

Experts recommend allocating 5-15% of your portfolio to gold for diversification, without overexposing it to a single asset. Gold's role as a hedge against inflation is more pronounced during periods of unexpected inflation than during periods of expected inflation.

Is physical gold better than gold Exchange-Traded Funds (ETFs) for inflation protection?

Both protect against inflation. Physical gold offers direct ownership but requires storage, while gold ETFs provide easier liquidity and lower costs.

Is gold good against inflation?

Gold is considered an effective hedge against inflation because its intrinsic value tends to rise when inflation affects purchasing power. Historically, higher gold prices have coincided with inflationary periods, making it a reliable asset during high inflation. However, the relationship between gold prices and inflation is not consistent across all countries and time periods, with some studies showing gold as an effective hedge in the short run but not in the long run.

What is the consumer price index, and how does it relate to gold?

The consumer price index (CPI) measures changes in the prices of everyday goods and services and is a key indicator of inflation. When the CPI rises, the purchasing power of money declines, often leading investors to prefer gold as a store of value, supporting higher gold prices over time.

Does inflation affect gold prices?

Yes, inflation generally causes gold prices to rise because it preserves their value as the currency's purchasing power declines. During inflationary periods, demand for gold increases, making it an effective hedge against inflation.

What is the relation between gold prices and the US dollar?

Gold prices are inversely related to the value of the U.S. dollar, meaning that a weaker dollar typically leads to higher gold prices.