Is gold a good substitute for cash in inflationary periods?
As we head further into a new year, gold is experiencing renewed interest and a strong price, with its performance being driven, in part, by investors wary of persistent inflation. In December, the U.S. Consumer Price Index (CPI) defied forecasts and rose to an annual inflation rate of 2.9%. Global conflicts and fears of a stagnating economy have also contributed to the recent uptick in the price of gold.
However, many gold experts aren't surprised by gold's current performance. Historically, investors turn to gold in times of inflation and economic unease. For example, they may use gold as a way to preserve wealth or as a substitute for holding cash during inflationary periods.
Can gold really act as a substitute for cash when inflation is high, though? Or is it more appropriate to think of gold as a complementary asset?
Learn more about the benefits of gold investing now.
Is gold a good substitute for cash in inflationary periods?
People often turn to gold during inflation because they see it as a stable asset, especially when cash loses its purchasing power.
"People often think of hard assets like gold or real estate as inflation protection because they see the price of acquiring those assets rising," says Brett Elliott, director of marketing at American Precious Metals Exchange (APMEX). "The truth is a little more complicated. It's not that the value of gold has increased; it's that the value of cash has decreased. It buys less of everything, but gold retains its value."
Elliott uses the price of a suit to illustrate this principle. In the 1940s, you could buy a tailored suit for about $40, which was also the price of an ounce of gold. Today, $40 may not even buy you a nice shirt, Elliott says, let alone a suit. However, an ounce of gold — now worth $2,720 — could still purchase a suit. This shows how gold holds its value over time while cash loses its buying power because of inflation.
Another reason gold holds strong against inflation is because, unlike cash, gold's value isn't tied to any specific country's economy or monetary policy. Plus, gold's scarcity adds to the attraction for investors.
As Pawan Jain, interim chair of finance at Virginia Commonwealth University, points out, gold's stock-to-flow ratio of 60 is historically high, meaning it would take about 60 years of current mining production to replace the existing gold supply.
"High stock-to-flow ratios often coincide with a 'scarcity premium,' meaning investors pay more for assets that are hard to increase in supply. Gold has a track record of performing especially well when the market uncertainty is high, partly attributed to its reliable scarcity," says Jain.
Start adding gold to your investment portfolio today.
Benefits of adding gold to your portfolio during inflation
Gold doesn't replace the liquidity and convenience of cash, but adding the yellow metal to your portfolio can help offset the impact of inflation. By making this move, you may help stabilize and diversify your portfolio during difficult economic times.
Elliott recommends investing a fixed amount at regular intervals to reduce the risks of market volatility.
"Dollar-cost averaging has been shown to decrease risk and improve ROI for the average investor. Even among the best investors in the world, the success rate for attempting to time the market is dismal," Elliott says.
Physical gold may help to stabilize your portfolio because of its relationship — or lack of one — with the stock market.
"Gold often moves independently of equities and bonds, helping investors diversify risk," says Jain. "This low correlation can boost overall portfolio performance during economic stress or when inflation undermines stocks and bonds."
Plus, geopolitical tension and economic downturns can disrupt stock and bond markets, but gold tends to retain its value as a safe-haven asset.
The bottom line
The spot price of gold has gone up nearly $150 per ounce since the start of the year. If you anticipate this upward trend will continue throughout 2025, you might consider purchasing the precious metal before it rises again, especially if inflation persists.
While gold may not be a substitute for cash, its ability to act as a hedge against inflation and independence from stock and bond performance make it an option worth considering. Keep in mind, though, that while gold is often seen as a reliable store of value over the long haul, it can experience volatile fluctuations in the short term. Experts generally suggest limiting your allocation to gold and other precious metals to 5% to 10% to help maintain a balanced portfolio.
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