Is gold still an effective inflation hedge?

Historically, gold has been regarded as a safe store of value against the potential for fiat currency to depreciate in value – in other words, as a hedge against inflation.

But for much of 2026 so far, higher inflation has coincided with lower gold prices.

“Gold was still up 6% over the year to the end of May,” said Joseph Greif, investment director at wealth manager Evelyn Partners, “but its recent behaviour has been uncomfortable for investors who expected it to protect portfolios immediately.”

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Inflation has run hotter since the Iran war broke out, especially in the US. The US is a critical market for gold; the metal is priced in dollars, so its usefulness as an inflation hedge is implicitly measured against US inflation.

But while the Iran conflict pushed inflation higher, the price of gold fell. Between 27 February – the day before the war broke out – and 10 June, the price of gold fell 23%. Annualised US CPI inflation rose from 2.7% in February to 4.2% in May.

Why the gold price fell during the Iran conflict

Inflation is not the only dynamic that gold prices interact with. One of the key ones is interest rates, particularly in the US.

Gold pays no interest. That matters less to investors when interest rates are low, because alternative assets like bonds aren’t offering much interest themselves.

But once interest rates increase – or when markets expect them to – then gold loses appeal relative to interest-paying investments.

This is the main reason gold prices fell, both before and during the conflict in Iran. The price of gold peaked on 29 January at $5,595, around a month before the war broke out. The catalyst for prices to start falling from then was Donald Trump’s nomination of Kevin Warsh as the new chairman of the Federal Reserve (Fed).

Until then, markets had assumed Trump would nominate a ‘dovish’ chair for the central bank and that this would result in relatively loose US monetary policy (i.e. lower interest rates) – a positive for gold.

By the time the Iran war broke out, markets had already spent weeks pricing in higher interest rate expectations. And the inflationary shock that the Strait of Hormuz’s closure prompted only amplified those expectations.

“The prolonged conflict sparked severe inflationary risks, pushing US inflation to 4.2% in May,” Benoît Harger, portfolio manager at private bank J. Safra Sarasin, told MoneyWeek. “This data forced markets to price in potential interest rate hikes instead of cuts. It boosted the appeal of yielding assets and triggered a 30% gold correction from its January high.”

This isn’t necessarily out of character with how gold has behaved in the past.

“What lots of people don’t realise about gold is it sells off in a crisis, often because of liquidity,” Cosmo Sturge, director of market strategy at metals fund manager Baker Steel, told MoneyWeek. “You had a lot of investors who had made a lot of money in the run-up to the [Iran] war, and suddenly that change in the outlook for inflation and the knock-on effect for interest rates [prompted them to] sell gold.”

Could gold still help hedge against inflation?

Despite the selloff, most experts agree that gold still has a role to play in portfolios, particularly as a hedge against inflation.

Central bankers are currently more constrained in how high they can push interest rates than they have been in the past.

The Fed hiked interest rates to as high as 19% in the early 1980s to combat rising inflation. This coincided with a steep decline in the gold price, from around $650 in January 1980 to around $320 in June 1982. But these high interest rates damaged the global economy and would be unworkable today.

“Rates clearly can rise, but could they rise to those levels again? Could the Fed really have the firepower to be able to fight true inflationary crises through monetary policy?” asks Sturge. “I'm not sure. Debt to GDP is four times higher than in 1980. You've had a huge increase in the money supply in the US, which has obviously been fueling inflation.”

If it reached a point where the Fed couldn’t control inflation through monetary policy, then financial repression – government policies that keep rates artificially low, at the expense of savers and private businesses – would result.

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

Similarly, Harger believes that gold remains an effective inflation hedge because it protects against long-term structural fragility. He argues that interest rates will eventually have to fall: “The global economy cannot sustain permanently high financing costs without triggering a recession. Furthermore, under-pressure growth and massive public deficits… limit long-term rate hikes.”

Gold, he says, will likely be a beneficiary of this eventual reduction in interest rates. “A strategic allocation may provide protection against sovereign risk and currency devaluation as rising debts force loose monetary policies.”

“Over the long term, gold being an inflation protection, I think, has held very well, but it tends to be more in terms of protecting your purchasing power rather than necessarily shooting sky high every time there's inflationary scare,” said Sturge. “It's driven by persistent debt growth: the fiscal deficits of the world, long-term currency debasement – these are the reasons why people hold gold.”