Investors often treat gold and oil as interchangeable inflation hedges. One tends to cause inflation, while the other is considered a traditional store of value. Historically, both have tended to benefit in rising inflation environments. Yet oil is up 38.7% year-to-date, while gold is up just 0.4%. What gives?
Figure 1. Percent Change in Oil and Gold Spot Prices Year-to-Date
Sources: Bloomberg L.P. and Potomac. Data as of August 6, 2026.
The reality is that oil and gold respond to different economic forces. Oil is more closely tied to economic growth and geopolitical events that threaten supply. Gold is more sensitive to monetary policy, the U.S. dollar, real interest rates, and uncertainty surrounding the financial system.
Gold is particularly responsive to movements in real yields, which represent the return a bond provides above the rate of inflation. Because gold does not pay interest, it becomes relatively less attractive when real yields rise. This helps explain why the precious metal has underperformed in 2026 thus far after rallying a stellar 64.6% in 2025 as the Fed transitioned from cutting rates to potentially raising them.
As Figure 2 shows, the two-year Treasury yield began moving lower in February 2025. Walmart issued a cautious outlook; services activity weakened, and consumer confidence fell. Investors began to believe that the economy was losing momentum and that the Fed would eventually resume cutting rates. Later that year, the Fed did exactly that, lowering rates in September, October, and December. As yields moved lower, gold climbed steadily.
That relationship changed following the conflict with Iran. Oil prices soared, inflation moved higher, and investors gradually shifted from expecting a prolonged Fed pause to considering the possibility that the central bank might eventually have to reverse some of its 2025 rate cuts. Real yields moved higher, and gold prices struggled. The shiny metal lost some of its sheen as an inflation hedge, even as inflation was moving higher.
Figure 2. U.S. Two-Year Treasury Yield vs. Gold Spot Price
Sources: Federal Reserve Board, Bloomberg L.P., and Potomac. Data as of July 27, 2026.
Oil Looks Like the Better Short-Term Inflation Hedge
To test the relationship more formally, we compared oil and gold from 2003 to the present. We begin in 2003 because that gives us actual market-based 10-year TIPS real-yield data and allows us to use the same study period throughout the analysis.
Figure 3. Oil and Gold Prices During Inflationary Periods
Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis (FRED), Bloomberg L.P., and Potomac. Data as of June 2026 for CPI calculations and July 2026 for real yield calculations. Note 1: The real yield is measured by the actual 10-year U.S. Treasury Inflation-Protected Securities yield. Note 2: "Strongest inflation acceleration" represents the top 25% of months ranked by the month-to-month increase in the year-over-year headline CPI inflation rate. Oil and gold returns represent their monthly price changes during those months.
Over this period, oil has had a much stronger relationship with actual inflation. Since 2003, its 12-month return has had a 0.55 correlation with year-over-year CPI, compared with just 0.08 for gold. That gap becomes even larger during the largest bouts of rising inflation, with oil gaining 3.9% per month while gold returned just 0.7%.
We believe this makes intuitive sense as higher oil prices can directly contribute to higher headline inflation through gasoline, transportation, and production costs. Gold does not have that same direct relationship.
Real Yields May Be the Bigger Story for Gold
The real-yield results may be even more important. During months when the actual 10-year TIPS real yield was rising, oil gained an average 2.2%, while gold declined 0.4%. Real yields rose in 128 of the 282 months observed, and oil outperformed gold in roughly 61% of those months.
With gold being a non-yielding asset, rising real yields increase the opportunity cost of owning it. Oil does not face that same problem. In fact, rising real yields can sometimes accompany stronger growth, higher inflation expectations or tighter monetary policy, conditions that may be much less damaging to oil.
That helps explain why gold can disappoint despite its reputation as a traditional inflation hedge. Inflation alone is not necessarily enough. What also matters is how the bond market and the Fed respond. If inflation pushes real yields lower, gold can do very well. If inflation leads to tighter monetary policy and higher real yields, gold's inflation-hedging characteristics can quickly disappear.
Gold Wins Over the Long Run
None of this means oil has been the better long-term investment. Far from it.
Since 2003, gold has generated a much higher return with less than half the volatility of oil. Its annualized inflation-adjusted return was 7.9% versus just 0.5% for oil.
Figure 4. Oil and Gold Long-Term Performance, 2003 – July 2026
Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis (FRED), Bloomberg L.P., and Potomac. Data as of July 2026. Note: Long-term performance is based on monthly data. Annualized volatility is calculated from monthly returns, while maximum drawdown reflects month-end peak-to-trough declines rather than daily or intraday moves. Nominal returns use market data through July 2026, while inflation-adjusted returns use CPI data through June 2026. Past performance is no guarantee of future results.
This is because gold's advantage is structural as it is a scarce monetary asset. It benefits from falling real yields, concerns about currency debasement, central-bank demand and periods when investors lose confidence in paper currencies or the financial system.
For example, global mines only added an additional 3,672 tonnes of gold last year.[1] That is less than a 2% increase in existing above-ground supply. By contrast, the U.S. M2 money supply has grown at an annualized rate of roughly 6% since 2003, while gross federal debt has grown by more than 8% per year. It is a lot easier to create dollars and debt than it is to create gold.
Oil has almost the opposite problem. Higher prices encourage more drilling, greater efficiency, conservation and eventually more supply. The shale revolution has made that response even more powerful. U.S. oil production reached a record 13.6 million barrels per day in 2025, roughly 40% more than either Russia or Saudi Arabia.[2]
As a result, oil-price spikes can be powerful, but often temporary. Higher oil prices eventually create the conditions for their own reversal. Gold does not face the same supply response, allowing gains driven by monetary uncertainty, falling real yields and concerns about the erosion of purchasing power to persist much longer.
Conclusion: Oil has been the better tactical hedge against an immediate inflation shock, particularly when real yields are rising. Gold has been the better strategic hedge against the long-term erosion of purchasing power.
[1] World Gold Council, “How Much Gold Has Been Mined?” and Gold Demand Trends: Q4 and Full Year 2025, Supply, January 29, 2026.
[2] U.S. Energy Information Administration, “The United States Produced More Crude Oil Than Any Other Country in 2025,” Today in Energy, July 9, 2026.
