Guard Against Inflation Buying Gold Coins or Bullion

For some people, the goal of investing is not so much getting ahead as it is not falling behind. Because inflation marches forward each and every year, the fear is that your buying power will diminish if your investments don’t appreciate as quickly as the cost of what you buy.

Theoretically, there’s a risk of deflation too, but economists tend to agree that it’s not likely. There’s also a fear among some that the U.S. dollar could simply become worthless someday, whether because of hyperinflation or some other reason.
Most savings can be eaten up by inflation. Bonds and bank deposits are particularly vulnerable. Because companies can raise prices, maintain profits and adapt to market conditions, the stock market has kept up with inflation and, in fact, has beaten it over long periods. But inflation is no friend to stocks; severe inflation damages the economy and thus companies too but many enjoy and increase buying gold coins or bullion gold bars.

There are two types of investments that are traditionally favored as inflation hedges: precious metals and real estate. And there’s one fairly new investment vehicle, “inflation-indexed securities,” that the U.S. government created last year to address inflation fears directly.

* Precious metals. Buying gold coins or bullion. If you talk to “gold bugs,” they will tell you that buying gold coins or bullion gold bars–the bellwether of precious-metal investments–holds its value over time. Buying gold coins or bullion gold bars when an ounce of gold would buy you a suit of clothes in the days of Henry VIII and it would still buy you a suit of clothes today.

What they won’t tell you is that while inflation has risen 3.1% per year, on average, since 1925, the value of gold–which became publicly available in the U.S. only in the late 1970s–has fallen from about $800 per ounce in 1980 to about $344 by the late 90s and a current prize of gold per ounce at this writing of $1333.65 per oz.

In a recent, interesting article on the Fool’s blog network the author tries to settle which precious metal, buying gold coins or bullion gold bars or silver, is a better investment and serves as a better hedge against inflation. But do these metals serve as a good inflation hedge to begin with?

Why gold and silver?

The sharp rise in demand for gold and silver started soon after the financial collapse in 2008, which was followed by the Federal Reserve augmenting its balance sheet by buying long term securities. This led to a sharp rise in the U.S money base. The price of gold and buying gold coins or bullion gold bars soon followed and rallied alongside the money base as seen in the chart below.

Many investors fell back on precious metals as a safe haven against a potential sharp rise in inflation. The Fed kept its asset purchase program and people kept waiting for the program to translate into a rise in inflation. Alas, inflation remained stable, below 2% in most years since 2008.

Gold price is beating inflation

Many gold and silver enthusiasts look at the sharp rally precious metals had in the past decade as a selling point for the benefits of holding gold or silver, especially as a hedge against inflation so many find themseleves buying gold coins or bullion gold bars to diversify and protect their wealth.