Northern Star

With inflation occupying increasing mindshare, what is gold’s strategic role?

By Andrew Naylor, World Gold Council Regional Chief Executive Officer, APAC and Public Policy

With second quarter CPI (consumer price index) in Australia jumping to its highest in more than 13 years, inflation is emerging as a key concern for investors. 

As a consequence, institutional and retail investors are looking for ways to protect against rising prices. In the long term, gold is a proven hedge against inflation, but its short-term performance is less convincing. 

More recent analysis by the World Gold Council shows that gold can indeed be an important component of an inflation-hedging portfolio.

Why is inflation a concern?

Investors in many markets around the world have been used to decades of relatively low inflation. COVID-19 has been a game changer. Supply chains have been tightened, and with the prospect of a quick economic recovery on the horizon in many markets, demand in many areas could substantially outstrip supply. 

Commodity prices in particular are reflecting this, as are business inventory data and shipping rates. Other factors are also coming into play – a huge increase in government debt (to fund unprecedented support packages during the height of the pandemic) and an indication that monetary authorities will tolerate higher inflation suggests that the risks are skewed toward the upside. 

Relationship between gold and inflation

Most global conversations on inflation focus on US CPI given the hegemony of the US dollar and US interest rates. But for all the discussion on gold as an inflation hedge, gold’s relationship to US CPI is surprisingly weak – historically CPI changes and gold returns have had a weak linear relationship.

And since 1971, when the US fully exited the Gold Standard, only 16 per cent of the changes in gold prices can be explained by CPI inflation. Other factors come into play. Another reason is that there are several tools that are used as inflation hedges – gold is just one. 

More recent analysis has compared gold to other inflation hedges, such as TIPs and REITs. Whilst this analysis shows that TIPs and REITs are the most consistent hedges against inflation, gold actually ranks third in rising inflation environments, and second in persistently high inflation environments. Sensitivity to inflation is just one consideration – others include reliability, accessibility and cost. 

A similar conclusion can be drawn from the long run picture and whilst there is more work to be done, gold’s financial asset status and its value as a means of saving, ties it more closely to economic growth and money supply growth in the long run, rather than just CPI. 

Strategic case for gold

So whilst gold can be an effective inflation hedge, along with other assets, what makes gold different? When analysing the strategic case for gold there are a number of attributes that make it an attractive asset class.  

First, it can be a source of returns. Investors have long considered gold as a beneficial asset during periods of uncertainty. Historically, it has generated long-term positive returns in both good and bad economic times. Looking back almost half a century, the price of gold in US dollars has increased by an average of nearly 11 per cent per year since 1971 when the Gold Standard collapsed. Over this period, gold’s long-term return is comparable to equities and higher than bonds. 

Gold has also outperformed many other major asset classes over the past five, 10 and 20 years. The average annual return of gold in Australian dollars was more than nine per cent between December 2000 to December 2020. 

This duality of gold (its long-term performance in both good and bad economic times) reflects the diverse sources of demand for gold and differentiates it from other investment assets. Gold is often used to protect and enhance wealth over the long term as it is no one’s liability, and it operates as a means of exchange due to its global recognition.  

Demand also comes from a range of sectors, including investment, jewellery, central banks and technology. Each has different drivers making gold a unique asset class. 

A second attribute is it can be an effective diversifier. The benefits of diversification are widely acknowledged – but it is hard to find effective diversifiers. Many assets become increasingly correlated as market uncertainty rises and volatility is more pronounced, driven in part by risk-on/risk-off investment decisions. 

As a result, many so-called diversifiers fail to protect portfolios when investors need them most. Gold is different in that its negative correlation to risk assets generally increases as these assets sell off.

Thirdly, gold is a liquid asset. It is traded globally and average daily trading volumes between December 2010 and December 2020 exceeded $245 billion.

Taking these factors together suggests that gold can enhance a portfolio’s risk-adjusted returns and it is for these reasons that institutions and individuals have long recognised the strategic role of gold.  

Australia is a critical component of the global gold market – in 2020 Australia was the third largest producer of gold in the world, after China and Russia. 

It is also home to some of the largest international refineries, processing material for the domestic and international markets. And with an estimated $2.7 trillion invested in superannuation funds alone (including self-managed funds) there is an opportunity for gold to play a larger role in protecting the wealth of the nation. 

Andrew Naylor

Andrew joined the World Gold Council in 2016 and since 2020 has led its regional office in Singapore. Originally part of the central banks and public policy team, Andrew was responsible for its Islamic finance initiative, culminating in the launch of the AAOIFI Shari’ah Standard on Gold.

Andrew Naylor.

Andrew started his career at international consultancy firm Cicero Group advising financial institutions on foreign investment and trade policy in Asia, and the global regulatory reform agenda. In this role, he provided economic and political commentary for global broadcasters including the BBC, Bloomberg, CNBC and China Central TV.

To read the analysis referenced in this article, or to access the World Gold Council’s gold valuation tool Qaurum, please visit 

This story also appears in the October issue of Australian Resources & Investment.