Is gold still a useful hedge against inflation?

Earlier in 2026, declining gold prices were accompanied by increased inflation

Is gold's value as a hedge against inflation diminishing?

In the past, gold has been seen as a hedge against inflation and a secure store of value against the possibility of fiat money losing value.

However, lower gold prices have been correlated with higher inflation for the majority of 2026.

According to Joseph Greif, investment director at wealth management firm Evelyn Partners, "Gold was still up 6 percent over the year to the end of May, but its recent behavior has been uncomfortable for investors who expected it to protect portfolios immediately."

Particularly in the US, inflation has increased since the start of the Iran War. Since the US is a crucial market for gold, its value as an inflation hedge is implicitly gauged against US inflation because the metal is valued in dollars.

Watch the entire video here. However, the price of gold decreased while inflation increased due to the Iranian conflict. Between February 27, the day before the war started, and June 10, the price of gold dropped by 23%. Between February and May, annualized US CPI inflation increased from 2.7% to 4.2%.

Why did the price of gold drop during the conflict with Iran?

The dynamics that affect gold prices are not limited to inflation. Interest rates, especially in the US, are one of the most important.

Gold is interest-free. When interest rates are low, that is less important to investors because bonds and other alternative assets don't yield much interest.

However, gold loses appeal in comparison to interest-paying investments when interest rates rise or when markets anticipate them to.

Before and during the Iranian conflict, this was the primary cause of the decline in gold prices. About a month before the war started, on January 29, the price of gold reached its highest point at £5,595. The appointment of Kevin Warsh as the new Federal Reserve (Fed) chairman by Donald Trump served as the impetus for prices to begin declining after that.

Up until that point, markets believed that Trump would appoint a dovish central bank chair, which would lead to comparatively lax US monetary policy (i). The e. reduced interest rates), which is good for gold.

During a swearing-in ceremony in the East Room of the White House in Washington, DC, US President Donald Trump, on the right, shakes hands with US Federal Reserve chairman Kevin Warsh.

The markets had been pricing in higher interest rate expectations for weeks prior to the start of the Iran war. And those expectations were further heightened by the inflationary shock caused by the closure of the Strait of Hormuz.

Benot Harger, portfolio manager at private bank J, stated that "the protracted conflict sparked severe inflationary risks, pushing US inflation to 4.2 percent in May." BFIA was informed by Safra Sarasin. "Markets were compelled by this data to factor in possible increases in interest rates rather than decreases. It caused a 30% decline in gold prices from their January peak and increased the allure of yielding assets."

Given Gold's past behavior, this isn't necessarily out of the ordinary.

Cosmo Sturge, director of market strategy at metals fund manager Baker Steel, told BFIA that "a lot of people don't realize about gold is it sells off in a crisis, often because of liquidity." "A lot of investors who had made a lot of money prior to the Iran War abruptly decided to sell gold due to the shift in the inflation outlook and the subsequent impact on interest rates."

Is it still possible to protect against inflation with gold?

The majority of experts concur that gold still has a place in portfolios, especially as an inflation hedge, despite the selloff.

Compared to earlier times, central bankers' ability to raise interest rates is now more limited.

In the early 1980s, the Fed raised interest rates to as high as 19 percent in an effort to curb growing inflation. The price of gold fell sharply during this period, from about £650 in January 1980 to about £320 in June 1982. However, these exorbitant interest rates hurt the world economy and are now unfeasible.

Sturge asks, "Rates can obviously rise, but could they rise to those levels again? Could the Fed really have the firepower to be able to be able to fight true inflationary crises through monetary policy". "I don't know. The ratio of debt to GDP has increased fourfold since 1980. The US money supply has significantly expanded, which has undoubtedly contributed to inflation."

Financial repressiongovernment policies that keep rates artificially low at the expense of savers and private enterpriseswould ensue if it got to the point where the Fed was unable to control inflation through monetary policy.

"That is a very positive environment for gold," says Sturge.

In a similar vein, Harger thinks that gold's ability to guard against long-term structural fragility makes it an effective inflation hedge. He contends that interest rates must eventually decline because "the global economy cannot sustain permanently high financing costs without triggering a recession." Long-term rate increases are also constrained by massive public deficits and under-pressure growth."

He claims that this eventual drop in interest rates will probably benefit gold. "As growing debt forces lax monetary policies, a strategic allocation may offer protection against sovereign risk and currency devaluation."

"I think gold has held very well over the long term as an inflation protection, but it tends to be more in terms of protecting your purchasing power rather than necessarily shooting sky high every time there is inflationary scare," stated Sturge. "People hold gold because of ongoing debt growth, global fiscal deficits, and long-term currency depreciation."