Gold has long been celebrated as a reliable hedge against inflation, with many investors drawn to its reputation for preserving value over time. A popular saying in investment circles suggests that one ounce of gold should roughly equate to the price of a high-quality men’s suit, symbolizing its enduring purchasing power.
This belief has fueled gold’s recent price surge, alongside increased buying by central banks diversifying reserves beyond the US dollar, and investors seeking refuge amid global geopolitical and economic uncertainties.
But does gold truly outperform as an inflation hedge? A closer look at historical data suggests a more nuanced picture—commodities as a group have shown more consistent protection against inflation than gold alone.
Historical Performance: Commodities Outpace Gold
Commodities include raw materials and basic agricultural products that are interchangeable, such as crude oil, natural gas, corn, wheat, coffee, and metals including gold, silver, and copper. Investors access these assets directly, through futures contracts, or via commodity-focused funds.
Data from multiple inflationary periods reveal commodities have reliably outpaced inflation across all observed time frames. In contrast, gold underperformed during two notable periods.
Gold performed strongly during the inflation spikes of the 1970s, driven by soaring oil prices, tight labor markets, and expanding monetary supply, as well as during the inflationary burst from September 2007 to July 2008 when oil and food prices surged. However, in the late 1980s—when consumer prices rose approximately 20%—gold’s returns stagnated. More recently, from mid-2021 through March 2023, gold’s price gains lagged broader commodity indexes by about 13 percentage points despite rising inflation.
Why Commodities Tend to Hedge Inflation Better
One key reason commodities are more dependable inflation hedges is their direct link to consumer prices. Many commodities, such as oil and natural gas, are components of the Consumer Price Index (CPI), so their prices naturally rise alongside inflation.
Moreover, commodity prices are driven by supply and demand dynamics. Periods of strong economic growth typically increase demand for commodities, which can drive prices higher—especially when combined with tight labor markets that put upward pressure on wages and costs.
Gold’s Price Drivers Are More Complex
Gold’s price behavior is influenced by factors beyond inflation alone. It responds to geopolitical tensions, interest rate expectations, central bank policies, and supply changes from mining output or recycling. For example, in the late 1980s, rising inflation-adjusted bond yields increased the opportunity cost of holding gold, a non-yielding asset, which suppressed its price gains.
Overlap and Risks to Consider
Investors should note that broad commodity funds often include gold exposure. For instance, the Bloomberg Commodity Index allocates about 14% to gold futures contracts, meaning investors in such funds are already gaining some gold exposure.
Both gold and commodities have historically lagged behind stocks over long periods and are subject to volatility and drawdowns. Investors using futures-based ETFs must also consider roll yield effects, where contracts priced higher in the future (contango) can erode returns over time.
On a risk-adjusted basis, neither gold nor commodities stand out as exceptional long-term performers, suggesting their allocations should remain modest in diversified portfolios.
Conclusion
While gold holds an iconic status as an inflation hedge, historical evidence indicates that commodities overall provide a more reliable buffer against rising prices. For investors primarily focused on guarding against inflation risk, commodities offer a stronger case than gold alone—though both asset classes warrant cautious, limited exposure within a balanced investment strategy.
