With Inflation at 3.5%, Is Now a Good Time to Buy the SPDR Gold ETF? Here's What History Says.

The U.S. Federal Reserve aims to keep the Consumer Price Index (CPI) measure of inflation increasing at a rate of 2% per year. Unfortunately, the CPI was tracking at a much higher annualized rate of 3.5% in June, which is why Fed Chairman Kevin Warsh is talking about hiking interest rates.

Inflation refers to a general rise in the price of goods and services, which effectively means your dollar has less purchasing power. One of the most tried-and-tested ways to preserve the value of your money is to buy hard assets like gold, which typically appreciate with inflation.

The SPDR Gold Shares ETF (NYSEMKT: GLD) exchange-traded fund (ETF) tracks the returns of physical gold. It soared in value by 64% last year, but it has lost around a quarter of its peak value over the last few months.

With the CPI well above the Fed's target rate, is now a good time to buy the ETF? Here's what history says.

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Inflation typically drives gold higher

Stocks and real estate often produce consistent income, so they have the potential to grow in value independent of inflation. Precious metals, however, don't produce anything, which is why investors like Warren Buffett prefer to avoid them. They typically increase in value due to their limited supply and because paper money is steadily declining in value.

Gold is incredibly scarce, with just 219,890 tons extracted from the ground throughout all of human history. Supply grows at a very slow rate of around 1.5% per year, and one day in the distant future, there probably won't be any left to mine. This gives investors, governments, and central banks the confidence to store the shiny yellow metal for the long term, because they know their reserves are likely to increase in value.

Gold was even ingrained in the entire financial system at one point. The U.S. government used to abide by the gold standard, which meant it could only print more dollars if it had an equivalent amount of physical metal in reserve. It abandoned this mechanism in 1971, and the money supply has exploded since then. The dollar has lost around 90% of its purchasing power, sending the value of gold soaring in dollar terms.

Gold Price in US Dollars data by YCharts

Rising oil prices have contributed to the recent spike in inflation, but so has the U.S. government's spending spree. It ran a budget deficit of $1.8 trillion in fiscal 2025 (ended Sept. 30), and it's on track for another trillion-dollar deficit in fiscal 2026. The national debt is creeping toward a record high of $40 trillion, and investors are starting to worry that policymakers will have to induce more inflation to manage this tricky fiscal situation.

Hedge fund manager Paul Tudor Jones has warned against this over the last few years, saying that throughout history, governments have often resorted to devaluing their domestic currencies to pay down their debt. By flooding the economy with money, wages and asset prices rise rapidly, leading to more tax revenue. In theory, this is very bullish for gold in the long term.

History points to modest returns from here

In my opinion, the reason gold is down 25% from its recent peak is that Warsh is warning of potential interest rate hikes to tame inflation. This would temporarily reverse gold's most bullish catalyst, particularly if it forces the government to tighten its purse strings.

In any case, the recent dip could be a great long-term buying opportunity, as gold has always climbed to new highs over time. However, annual returns of 64% certainly aren't typical, so a repeat of 2025 is unlikely. In fact, gold has delivered a far more modest compound annual return of just 7.4% over the last 50 years, which is a more realistic target for investors.

Buying physical gold is the surest way to profit from the yellow metal's potential upside, but storage and insurance can be expensive, and it's also tricky to sell quickly in a pinch. The SPDR Gold Shares ETF can be a great alternative because it can be bought and sold instantly on any major investing platform and doesn't require storage or insurance.

The ETF does have an expense ratio of 0.4%, though, which means every $10,000 invested will incur an annual fee of $40. However, it's probably still cheaper than holding physical metal.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.