Inflation is down. Here's what that means for gold investors.

One of the most appealing aspects of investing in gold is its use as a hedge against inflation. When inflation is high, gold's value can go up, as more people move their money to the precious metal and away from the devalued dollar.

That's been a great incentive for investors over the past few years, as inflation reached as high as 9%. But the latest Consumer Price Index shows inflation is continuing to cool. Following a trend over the past few months, inflation is now at 3% — the lowest rate in over two years. 

Lower inflation is good news for your wallet, but thanks to gold's relationship to inflation, it may also impact your investment.

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How inflation affects gold 

Gold makes for a solid inflation hedge because its price tends to remain steady, or even improve, when the value of the U.S. dollar goes down. Gold's inverse relationship with the dollar means many people invest in it during periods of inflation to preserve their purchasing power — and that demand can push gold's price upward. 

But inflation is only one piece of the puzzle when it comes to factors that can affect the value of gold. Everything from global events to federal interest rates to supply and demand can influence the price of gold at any given time.

Inflation may have a bigger indirect effect on gold later this month when the Fed makes its next rate decision. While rates are cooling, they still haven't met the Fed's 2% target. At least one more expected rate hike and extended period of high interest thereafter could drive gold prices down in the near future since high interest rates can prompt people to move their money into other secure and high-earning accounts and ultimately help the dollar's value.

This relationship is, surprisingly, making inflation a big headwind for gold prices lately, Mel Mattison, CFP, financial services professional and consultant, recently told CBS News. "If inflation stays sticky, prompting the Fed to hold rates at higher levels for longer, this would likely strengthen the dollar and limit gold's upside."

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What cooling inflation means for gold investors

Cooling inflation isn't a reason to forgo making an investment in gold. For long-term investors turning to gold for its value over time, short-term changes in gold's price shouldn't have much of an effect.

Gold historically makes a great store of value over the long term. Its price has risen by almost 50% over the past decade and nearly reached all-time highs just this year. While gold may not help you grow your wealth the same way traditional stock investing can, it can be a stable asset within your portfolio through periods of uncertainty.

That's why experts recommend investing only about 5% to 10% of your portfolio in alternatives like gold. With that allocation, you can weather the storm when markets drop during economic downturns and maintain your purchasing power through inflationary periods. But you'll also have plenty of space to grow your investments with riskier but higher-earning assets over time.

Inflation may be receding today, but you can still expect economic cycles to repeat into the future. Especially if you plan to keep investing for decades to come, diversifying your portfolio with non-correlated assets like gold may be worthwhile.

The bottom line

Gold can be a good investment option in any economy, depending on your individual investment goals. While gold is a great hedge against inflation, its value doesn't end when inflation cools. Despite short-term fluctuations, gold is a great store of long-term value and can help you maintain your portfolio's value during future periods of inflation or economic uncertainty. Diversifying with an appropriate allocation may be a good way to reach your long-term investment goals.

Considering investing in gold today? Speak with a trusted expert, like a financial advisor, about how gold may fit with your individual portfolio and plan. And start exploring options available to you now with a free investment guide.