Gold: the ultimate inflation hedge

Should investors put their trust in the world's oldest inflation hedge?

Image: Telegraph

Emma Simon
Telegraph

Is gold the ultimate hedge against inflation? Many investors clearly think so and with inflation now running at twice the Government's target it is not surprising that gold hasn't lost its lustre.

Recent research from the World Gold Council shows how gold has held its value over the long term when compared with other commodities. The relative price of gold and oil has remained almost constant over the past 50 years. So although the price of both (in either pounds or dollars) has risen during this period, if you were buying a barrel of oil with bullion you would hand over roughly the same weight of gold as you would have done in 1950.

More startling is that gold has retained this purchasing power over even longer periods. It is thought that an ounce of gold bought 350 loaves in the time of Nebuchadnezzar, the king of Babylon who died in 562BC. An ounce of gold still buys roughly 350 ordinary sliced loaves today, showing that over 2,500 years gold has proved a very effective hedge against inflation, at least when it comes to everyday essentials.

Given our current economic situation, it's not hard to see why there is increasing demand for an asset that appears to offer inflation-proofed returns.

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