Gold and inflation: how secure is the precious metal in times of crisis?

When inflation rises and fiat currencies like the US dollar lose purchasing power, many investors look for safe ways to protect their assets. Precious metals such as gold are traditionally seen as a stable option to offset losses in value. But how reliable is gold really as protection against inflation?

In this guide, you’ll learn how inflation affects wealth and currencies – and what role gold can play in times of economic uncertainty. We’ll explore why gold is often seen as inflation protection, review historical developments and highlight what to consider when investing.

• Consequences of inflation: Inflation leads to a loss of purchasing power for fiat currencies such as the US dollar and affects the real value of wealth in the long term.

• Inflation protection: Gold is considered protection against inflation, as it exists independently of fiat currencies as a limited precious metal and thus offers a hedge against inflation and currency devaluation.

• Development: In recent years, gold has managed to preserve its real value even during periods of high inflation, although it hasn’t always reacted immediately to rising consumer prices or currency devaluation.

• Influencing factors: Gold prices are not determined by inflation alone but also by factors such as supply, demand, global crises and confidence in currencies.

What is inflation and how does it affect currencies and wealth?

Inflation describes the sustained increase in the general price level within an economy. This means that, over time, you can afford less with the same amount of money, as its purchasing power decreases. The inflation rate indicates how much prices have increased over a specific period. It’s usually calculated based on the consumer price index.

The causes of inflation are varied, but they can usually be traced back to a few key factors:

• a sharp rise in demand for goods and services that exceeds supply

• rising production costs, such as higher prices for energy or raw materials

• an expansive monetary policy by central banks with low interest rates and increased money supply

• external factors such as political conflicts, crises or global supply bottlenecks

Inflation has direct effects on fiat currencies like the euro or the US dollar. When prices rise faster than incomes, money loses its real value. As a result, traditional investment forms like bonds suffer from a loss of purchasing power. The result? Many investors actively look for investments considered especially stable in value and inflation-proof. Gold has repeatedly proved a preferred choice, as it exists as a limited precious metal independently of the fluctuations of fiat currencies. Many investors therefore assume gold can act as a hedge against inflation in years of crisis.

Gold price and inflation over time

What happens to the gold price when inflation rises? The answer has changed repeatedly throughout history. This chapter explores the historical relationship between gold prices and inflation, analyses causes and effects, and shows how this dynamic has evolved over the decades.

Gold as inflation protection under the gold standard

Gold was used as money or through gold-backed currencies for much of history. In systems like the classical gold standard (1870–1914), inflation was virtually excluded, as the money supply was directly tied to available gold reserves. In such times, the price of a troy ounce was stable because it was fixed to the respective currency.

With the end of the Bretton Woods system in 1971 and the US dollar’s decoupling from gold, a new era began. The Bretton Woods system was an international monetary system established in 1944 after the Second World War. The currencies of participating countries were pegged to the US dollar, which in turn was backed by gold. Once the dollar was decoupled from gold, however, gold could be traded freely and its price was determined by supply, demand and macroeconomic factors.

The 1970s: gold price boom and inflation fears

A particularly striking example of the link between inflation and gold prices is the stagflation period of the 1970s. Due to oil price shocks, geopolitical tensions and more expansive monetary policy, inflation rose sharply in many industrialised countries. At the same time, gold prices skyrocketed – from around 35 US dollars per troy ounce in the early 1970s to over 800 US dollars by the end of the decade. This decade showed clearly: gold served as protection against loss of purchasing power, especially when confidence in currencies waned.

The 1980s and 1990s: monetary stability and falling gold prices

When the US Federal Reserve under Paul Volcker tackled inflation in the early 1980s, price increases were curbed. In the years that followed, inflation was low and stable in many Western countries. In contrast, gold prices fell and remained at moderate levels for years. In an environment of stable prices and credible central banks, gold loses its appeal as inflation protection.

2000s to today: financial crises, zero interest rates and new uncertainties

The turn of the millennium brought new challenges: the dotcom bubble, the 2008 financial crisis and most recently the Covid pandemic led to expansive monetary policy and rising public debt. Many investors once again viewed gold as protection against inflation and as a crisis currency. In 2011, the gold price reached a new all-time high of over 1,900 US dollars per troy ounce. Between 2013 and 2018, the price fell again despite moderate inflation. With the pandemic and the return of higher inflation rates from 2021, the price climbed above 2,000 US dollars.

Gold and inflation in the 21st century: a more complex relationship

While in the past there was a direct connection between inflation and gold prices, today the correlation is more complex. The following factors influence this relationship:

• Real interest rates: If real interest rates (nominal interest minus inflation) rise, gold becomes less attractive as it doesn’t yield ongoing returns

• Currency development: A weak US dollar (the currency in which gold is traded) can push up gold prices

• Geopolitical crises: Gold often benefits from global uncertainty regardless of inflation

• Investor behaviour: ETFs and digital trading platforms like Bitpanda have made gold more accessible

Historical trends show: gold and inflation are closely, but not linearly, linked. Gold can serve as inflation protection, particularly in times of extreme monetary uncertainty. But its effect now depends more on expectations for future currency stability, real interest rates and confidence in currencies and institutions. In a dynamic global economy, gold remains an important, though not unequivocal, instrument for preserving value.

Buying gold during inflation: opportunities and risks

In times of high inflation, many investors wonder how to protect their wealth from loss of value. One of the most common answers is: buy gold. But what’s behind this decision? Why do investors increasingly turn to gold as inflation rises and currencies depreciate?

This section first examines the motivation of investors who buy gold to protect their wealth from the effects of inflation. We’ll explore the opportunities gold buying offers during inflation and also highlight the risks linked to this form of wealth protection.

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Opportunities

When inflation weakens the purchasing power of currencies and uncertainty dominates the markets, gold traditionally comes into focus for many investors. But what is this trust based on? In this section, we’ll explore the reasons why gold is considered a hedge against inflation.

Gold as a stable asset in times of crisis

In economic and political crises, many investors look for safe asset classes that are not subject to financial market fluctuations and exist independently of government currencies. Especially in times of high inflation or currency devaluation, gold is often seen as a reliable investment that can preserve purchasing power regardless of interest rates or market movements.

Protection against currency devaluation

Demand for gold tends to rise during periods of increasing inflation rates. Many investors purchase precious metals as a hedge against inflation, as gold has managed to retain its value in past crises. One reason for this: gold is a limited precious metal, and its supply cannot be arbitrarily expanded by central banks, making it a safeguard against the devaluation of fiat currencies caused by inflation.

Historical development builds trust

Trust in gold stems, not least, from its long-standing role as a crisis currency. In many periods of high inflation – such as the 1970s or the 2008 financial crisis – the gold price saw significant increases. These historical experiences shape many investors’ expectations that the gold price will rise or at least remain stable during inflation. This trust is often reinforced during times of economic uncertainty.

Independence from monetary policy

While central banks directly influence fiat currencies through measures like increasing the money supply or adjusting interest rates, gold is only affected by these interventions to a limited extent. The independence of the precious metal makes it especially valuable for many investors.

By the way: central banks themselves also buy gold to strengthen their currency reserves, which further reinforces trust in gold as protection against inflation. Want to learn more? Then check out our guide on “Central banks and gold”.

Risks

Although gold is considered a classic hedge against inflation, buying during crises is by no means risk-free. Anyone investing in gold should realistically assess the potential downsides – because not every inflation phase automatically leads to rising gold prices. It’s especially important to critically evaluate the role of gold in your portfolio and align it with your personal investment goals. Potential risks include:

Short-term volatility in gold prices

Despite its long-term stability, the gold price can fluctuate sharply, especially in the short term. During periods of economic turbulence or sudden market changes, rapid price drops are possible.

High transaction and storage costs

Buying physical gold comes with costs – not only during inflationary periods – such as for purchasing, transport and secure storage. Especially during high inflation, these expenses can significantly reduce the value of your gold if not carefully considered.

No ongoing returns

Unlike asset classes such as stocks or bonds, which can generate dividends or interest, gold offers no regular income. This can be a disadvantage during high inflation when income streams are especially important.

Risk of overvaluation

When inflation fears rise, demand for gold can surge – and with it, the price. In such periods, overvaluation is a risk. If the economic situation stabilises or inflation decreases, the gold price can fall accordingly.

Limited liquidity

Selling physical gold is not always immediately possible. Depending on the storage location, market conditions and trading method, delays or markdowns may occur when selling – a disadvantage if quick access to capital is needed.

Conclusion: is gold inflation-proof?

The questions of whether gold is truly inflation-proof and whether gold prices always rise with inflation cannot be answered with a blanket statement. While inflation undoubtedly influences gold’s value, there are also other factors that shape the gold price, such as central bank interest rate policies or geopolitical events.

Over the past years, gold has repeatedly proven to be a store of value during periods of high inflation and economic uncertainty. It not only protected against currency devaluation but also offered a way to preserve wealth during crises.

However, gold is no cure-all: inflation protection depends on numerous variables and your individual investment strategy. If you're considering buying gold due to inflation, you should carefully weigh the opportunities and risks. In many cases, gold can be a meaningful addition to your portfolio – provided it's used as part of a broadly diversified investment strategy and not as your sole means of wealth preservation.

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