Gold and precious metals have been and still are the best hedge against inflation. But you have to look at precious metals as a paper asset versus silver coins and gold bars. Initially, what is a hedge against inflation? An inflation hedge is an asset that loses little value in periods of rising prices. It therefore holds its value and purchasing power during an inflationary period. Investors expecting inflation will typically buy this asset type to hedge against rising prices. Precious metals will actually increase in value since they are such an ideal inflation hedge.
The best way to address this question is to look at real assets versus financial assets. Real assets have intrinsic value, which is value of their own. They have direct or indirect usefulness like cars, wheat, corn, gold, real estate, land, and even appliances etc. Financial assets are a claim of profit of a firm, family or government. They would be stocks, bonds, mortgages, trust funds and the likes. Generally, real assets like gold, vacant land, and other commodities are a better hedge against inflation. These real assets have a value of their own, and are not devalued when everything else is inflating in price. Ideal hedges should hold their value over time and not lose their value. Produce and cars lose value over time, while precious metals (gold, silver, palladium), and vacant land and even wine will hold its value.
Another key element of an inflation hedge is its marketability. Is there a market for the commodity at virtually any given time? There is a market for soybeans, heating oil, gold and land, but things like shoes, furniture, and stocks have a limited market, and re-sale market. Another feature of a good hedge is its divisibility. Essentially can the asset be broken down into smaller portions? A house, car and land can not be broken down, but gold, gas, and agricultural products can be.
The best hedge against inflation has been and will continue to be gold, but we are referring to the hard asset of coins, bars, and even a mine that you own. Holding gold in stocks, ETF’s, or shares in a gold or silver mine is a financial asset and not a good hedge. Real Estate like a rental house, apartment, or vacant land is a good hedge but not the best, since it is not as marketable and not divisible like gold and other commodities.
The problem is the availability of gold coins and bars and nobody but a farmer will hold perishable commodities like wheat, or corn in their back yard. We think vacant land is a good alternative as an inflation hedge for investors since it is inexpensive, available and it will hold its value until inflation ebbs. It also doesn’t need to be maintained, will not deteriorate, and it can’t be rustled or stolen.