Inflation is one of the economic terms most feared by consumers. It means that they can purchase fewer goods and services with their money and, therefore, lose purchasing power and quality of life. One of the fears of the current economic situation is the forecast of a rise in inflation. Before her, gold is also presented as an essential element of protection. In this post we are going to see what inflation is, what is expected for the coming years and how gold can help reduce its impact on our economies.
The economic crisis caused by the Covid-19 pandemic has brought many unintended consequences: business and company closures, increased unemployment, reduced consumption, decreased imports and exports.
Analysts warn of a possible rise in inflation as a result of the current situation of the global economy and the measures that governments and central banks are adopting to deal with it.
What is inflation?
Inflation is called the general and sustained increase in the prices of goods and services in a country during a certain period of time, which is usually one year.
This means that, with the same monetary unit, fewer goods and services can be purchased. Therefore, inflation is the visible effect caused by the devaluation of the currency.
To measure it, the growth in the prices of a weighted basket of goods is used. The index that measures its annual variation is the Consumer Price Index (CPI) .
Its causes are multiple: increase in the price of raw materials, in the demand for goods, forecast rise in prices.
There are different levels of inflation: it can be moderate (less than 10% per year); galloping (of two or three digits); or hyperinflation (over 50% per month, that is, close to 13,000% per year).
To combat it, interest rates for consumption are usually increased, which discourages consumption and, therefore, discourages consumers from acquiring more goods and services than are strictly necessary.
The problem is that this reduction in consumption also affects the industry that produces the goods, which can lead to economic stagnation and increased unemployment.
The actual situation
According to a recent report by the Luxembourg consultancy Incrementum , “the current monetary policy and the change in investor objectives is sowing the seeds of a new inflationary paradigm. This seed is flourishing now thanks to the Covid-19 crisis .
For its part, the fund manager Midas Funds recalls that the US debt is already close to 27 trillion dollars, which represents 143% of GDP: “of all the likely scenarios, a rise in inflation is the easier . “
Although inflation levels are not expected to reach those of the 1970s, Midas Funds analysts believe that with interest rates as low as they are today, inflation will not need to rise much to affect the purchasing power of consumers.
Gold as a hedge against inflation
Faced with an environment of growing inflation, with the devaluation of the currency and the loss of purchasing power on the part of consumers as the main consequences, investors (and consumers themselves) must seek means to protect their assets against the threat.
According to the World Gold Council :
“commodities are often used as diversification elements during periods of high inflation. While it is true that they have performed well during these inflationary periods, gold has done even better. And in periods of low inflation, commodities have had negative nominal returns, while gold has registered a positive appreciation .
From Midas Funds they agree that, in an inflationary environment, gold will continue to shine as an alternative asset that can preserve investors’ assets: “if you want to preserve capital, gold has historically been the best way to do it” .
The consulting firm Incrementum describes, in its report, the advantages that gold has as a store of value in an environment of high inflation:
- It allows the diversification of the portfolio of the investment portfolio, since its correlation with other assets is on average 0.1.
- It constitutes an effective protection against the so-called ‘tail risks’ or ‘tail risks’, which refer to events that have little chance of occurring and that affect an investment portfolio.
- It is an asset with great liquidity , greater than that of German and US bonds, and than stocks.
- It protects the investment portfolio in times of rising inflation and strong deflation .
- Protects against currency devaluation risk as it is inversely correlated with fiat currencies, especially the US dollar.
“Its relative scarcity is the main advantage of gold compared to fiat currencies. Gold is essentially immune to inflation, due to its scarcity. Therefore, it makes sense to include it in the investment portfolio as an element of protection against inflation, while the global economy is heading inexorably towards an unprecedented monetary swamp” , they conclude from the Luxembourg consultancy.