Gold Vs Inflation: Is The Classic Hedge Still Working In 2025?

For decades, gold has been considered the go-to asset during periods of high inflation. It has long been viewed as a store of value when fiat currencies lose purchasing power. But as 2025 unfolds, investors are questioning whether that relationship still holds. After a sharp rise in gold prices in 2024, the current year brings a mix of uncertainty: inflation appears to be stabilising, but gold remains elevated. Is it still doing the job it’s known for, or have the dynamics changed?

Inflation Trends and Monetary Policy in 2025

Inflation has eased from its post-pandemic peaks in most developed economies. The US Consumer Price Index (CPI) now hovers around 2.6%, down from highs of over 8% seen in 2022. Similarly, inflation in the Eurozone has moderated, although food and energy remain volatile. Central banks, led by the Federal Reserve, have signalled a cautious stance on rate cuts. While a pivot is expected in the second half of the year, the messaging remains hawkish.

Inflation expectations, as priced in by bond markets, suggest a long-run average closer to central bank targets. Despite this moderation, the aftershocks of previous inflation spikes continue to affect consumer sentiment and investor positioning. In this environment, gold’s role as a protective asset is under close scrutiny.

Gold’s Historical Correlation with Inflation

Historically, gold has served as a partial hedge against inflation, though not always a perfect one. During the 1970s, a decade of runaway inflation, gold prices surged more than 1,000%. However, in more recent cycles the relationship has been inconsistent. From 2000 to 2020, gold rose substantially, but this was driven as much by financial crises and monetary easing as by inflation alone.

From 2021 through early 2023, as inflation climbed sharply, gold underperformed at first, struggling to break out amid rising real yields and a strong dollar. It was only later, in 2024, that the metal gained significantly, partly in anticipation of a policy shift and growing geopolitical tensions.

The key takeaway from the data is that gold’s correlation with inflation is context-dependent. It tends to perform best when inflation is high and interest rates are low or falling—conditions that are only now beginning to converge again.

Current Gold Price Dynamics

In early 2025, gold is trading near its all-time highs, supported by a mix of macroeconomic factors. These include:

• Anticipation of Fed rate cuts later in the year

• Strong central bank buying, particularly from emerging markets

• Increased retail investor demand driven by geopolitical concerns

However, the rise in gold prices is not purely inflation-driven. Real yields, while off their peaks, remain positive in the US, which typically suppresses gold. That suggests other factors, such as global uncertainty and currency diversification, are playing a larger role.

ETF flows have been mixed. After a strong inflow period in late 2024, some funds have seen moderate outflows in Q1 2025. Futures markets show neutral positioning, with neither extreme bullish nor bearish bets dominating. The gold rally, while notable, is fragile and responsive to central bank signals.

Challengers to Gold’s Inflation-Hedge Status

Several factors are diluting gold’s traditional role. One is the growing use of alternative inflation hedges. Treasury Inflation-Protected Securities (TIPS) have become more attractive with higher yields, offering a more direct link to inflation indices.

Cryptocurrencies like Bitcoin are also increasingly viewed by some as digital gold. While their volatility makes them less reliable, institutional investors are beginning to diversify into crypto as part of inflation hedging strategies. Commodities such as oil, copper, and agricultural futures have also shown stronger performance during inflationary spikes.

Investor behaviour has shifted, too. A younger generation of traders may be less inclined to turn to gold, instead favouring more tech-aligned or decentralised assets. This shift is gradually eroding gold’s dominance as the default safe-haven.

Defending Gold: Why Some Still Rely on It

Despite these challenges, gold continues to enjoy strong support from a wide base of investors. Central banks remain heavy buyers, particularly in countries like China, India, Turkey, and Russia. These purchases are often driven by a desire to diversify away from US dollar reserves, rather than inflation per se, but they nonetheless provide structural support to gold markets.

In addition, gold still performs a valuable function in long-term portfolios. Its low correlation with equities and fiat currencies makes it a stabilising force during market drawdowns. When inflation and economic stress coincide with financial instability, gold tends to outperform.

Geopolitical uncertainty also plays a role. With multiple flashpoints—Ukraine, Taiwan, Middle East—investors continue to value gold’s ability to act as a hedge against unanticipated shocks. In that sense, its role may be expanding beyond inflation to encompass broader systemic risk.

Market Outlook: Is the Hedge Still Intact?

Opinions are divided. Analysts at Goldman Sachs and UBS maintain a constructive outlook on gold, citing strong central bank demand and declining real rates as supportive factors. Others argue that unless inflation reaccelerates or the Fed pivots sharply, gold may struggle to break decisively higher.

The outlook depends on several factors:

• Timing and magnitude of Fed rate cuts

• Movements in real interest rates

• Continued geopolitical stress

• Stability of the US dollar

For investors, the strategy may no longer be about buying gold as a blanket hedge against inflation, but rather as part of a diversified risk management approach. Allocations to gold are increasingly tactical rather than strategic, responsive to short-term market signals rather than long-term inflation expectations alone.

Conclusion

Gold is not a perfect inflation hedge, but it remains a relevant one—especially in a world shaped by economic volatility, geopolitical risk, and shifting investor sentiment. While its role may be evolving, it still offers protection in specific scenarios. In 2025, whether gold continues to outperform will depend more on interest rates, real yields, and market psychology than on inflation alone. Investors would do well to monitor those signals rather than rely on historical assumptions.

Author: Brett Hurll