Gold has gotten a bad rap in 2013, with the precious metal off more than 20% on the year. The declines have been due in part to speculators and sentiment, but also because the rate of inflation has been so low — and inflation is one of the biggest factors that pushes up gold prices.
If you expect big inflation down the road, hiding out in gold might be a decent option. Consider that as the U.S. suffered double digit inflation from 1979 to 1981, gold prices soared. Specifically, the precious metal went from under $230 in January 1979 to around $550 in January 1981 — with a peak of more than $850!
If you’re interested in playing gold, a physical investment in coins or bars is the most direct way. However, a number of funds including the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) allow investors to play gold bullion prices directly without the hassle of buying the metal, storing it and then trying to sell physical gold when they want to liquidate their investment.
Of course, gold investors need to remember that when inflation loses steam, so does gold — as we’ve seen with the precious metal’s fall from grace lately. It’s also worth noting that some critics say speculators trading “paper gold” via securitized funds like GLD have opened the door to greater volatility and perhaps even manipulation of the market.
So keep in mind that while gold might be a faithful hedge on inflation, that doesn’t mean you can’t lose big money if gold prices fall based on market conditions.