Frankfurt Inflation is dominating the headlines at the moment. In the USA it was most recently over five percent, in Germany over four percent. Such values have not existed for a long time. In view of the development of the past few months, many experts believe that the rise in prices is not a temporary phenomenon – it could become a problem.
Gold is considered the classic protection against strong price dynamics. The precious metal has been a means of payment that has been accepted worldwide for thousands of years. This is what distinguishes gold primarily from virtual escape currencies such as Bitcoin, which are sometimes referred to as the new gold.
The actions of the central bankers are decisive here: If prices continue to rise, many market participants believe that they could step in and take money out of the market by scaling back their extensive bond buying programs (also known as tapering). If necessary, they will raise interest rates. That, in turn, would depress the gold price, which is currently around $ 1,800, around 15 percent below its all-time high, because bonds would then be more attractive as an investment.
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Ned Naylor-Leyland, gold expert at asset manager Jupiter Asset Management, does not want to follow this assessment. Regarding the three assumptions that are currently slowing the gold price – inflation as a temporary phenomenon, tapering and the following rate hike by the central banks – he says: “If even one of these three assumptions should prove to be incorrect, the gold price should get a strong boost. Personally, I think it is more likely that all three assumptions are wrong than that all three are correct. “
Simon Jäger, fund manager and gold expert at Asset Management Flossbach von Storch, also doubts that the central banks will significantly increase interest rates. His main argument: the high total indebtedness of the states.
Take the USA, for example: private households, companies and the state have pumped together more than 60 trillion dollars. If interest rates rise too quickly, the additional burden inevitably leads to personal bankruptcies, corporate bankruptcies and falling government spending. That explains why the central bank is acting so cautiously. The US simply cannot afford significant rate hikes either. “Every percentage point increase in interest rates means an additional annual interest burden of over 600 billion dollars,” says Jäger.
Rising raw material prices and delivery bottlenecks
So it is quite conceivable that prices will continue to rise, that inflation will not pass so quickly. The dynamics on the commodity markets, which could support the gold price, also contribute to this. Energy prices are currently skyrocketing. Oil is more expensive than it has been in seven years. As a result, the demand for gas is increasing and is finding empty warehouses and rusty supply chains.
This increase cannot be explained solely by the post-corona contractions. “The world has a limited and dwindling amount of physical resources and an ever-increasing amount of credit money,” says Jupiter expert Naylor-Leyland. “For me, there will always be deflation in money and credit and inflation in goods, services and real assets in this system.”
In addition to the increased raw material prices, there are currently bottlenecks in numerous intermediate products in the automotive and consumer goods industries. Computer chips, for example, are currently in short supply. Some companies have to cut back on their production. So is economic growth also weakening? Then, according to the experts, there is an even bigger problem: stagflation.
That brings back memories of the 1970s: two oil crises in a row fueled inflation. The economy stalled, energy seemed priceless. At the beginning of the 1980s the problem grew into an economic conflagration. In the US, prices rose by up to 15 percent a year. The then US Federal Reserve Chairman Paul Volcker only put an end to this development when he fixed the key rate at the beginning of the 1980s at an unbelievable 20 percent today. As a result, inflation expectations first fell, then prices fell.
Gold was having its big time back then. The troy ounce price, which had been around $ 35 for decades, was released in 1973. Shortly thereafter, the price skyrocketed to over $ 100, and by the early 1980s to the $ 850 mark. The belief in gold as a protection against inflation and as a safe haven, with which a lot of money can be made in times of crisis, dates back to this time.
The gold price has been hovering around the $ 1,800 mark for several months. The yellow precious metal has left the corona shock behind for the time being.
(Photo: imago / Frank Sorge)
Is that still true today? Gold isn’t cheap right now. In early March 2020, the ounce of gold hit a five-year high at around $ 1,670. The world then went into corona lockdown, and the mood of panic on the capital markets darkened. The share prices collapsed almost worldwide.
The gold price also initially fell below $ 1,500. “If there is panic in the markets, the first reaction is to sell all liquid asset classes – including gold,” says Flossbach-von-Storch fund manager Jäger.
In fact, the gold price began to rise again in mid-March 2020. “Gold has proven itself as a currency in crisis,” explains Jäger. As the infection and incidence numbers rose, so did the gold price, until it hit a new all-time high at around $ 2070 in early August 2020.
Around that time, positive news about the first vaccines against the coronavirus caused a change in sentiment. Free investor money drove the stock markets to new highs worldwide. The price of an ounce of gold plummeted and has been hovering around $ 1,800 for months. That is around 15 percent lower than the all-time high, but it is well above the price before the pandemic broke out.
How investors can invest
What do investors have to prepare for in the coming months? A drastic change in the ultra-loose monetary policy of the central banks, which want to combat high inflation with rising interest rates? That would be bad for the gold price. Or are the central bankers only cautiously redirecting and risking moderate increases in interest rates, a further acceleration in price increases while economic growth rates fall at the same time? That would benefit the gold price.
The uncertainty is great. And gold is well suited for such situations. It is used to hedge against unlikely scenarios. It is therefore always advisable for private investors to invest part of their portfolio in gold. Most experts recommend a value of around ten percent. Should there actually be a shock in the financial markets or stagflation, the expected increase in value for gold can mitigate the losses in the portfolio as a whole.
There are three common options for investing in gold. The purchase of bars and coins is simple and widespread. The purchase of certificates backed with physical gold is an alternative. Finally, buying stocks in gold mining companies is an option. However, these securities do not develop in parallel with the gold price. They are subject to greater fluctuations. It all comes down to choosing well-run companies.
With bars and coins, investors acquire a physically tangible asset, the amount of which is limited. So far, only around 200,000 tons of gold have been mined worldwide. This corresponds to a cube with an edge length of around 21 meters, i.e. roughly the volume of an apartment building. And gold cannot be increased at will, the global stock is only growing by around 1.5 percent annually.
Finally, there remains the stable value. To show how well gold is suitable for maintaining purchasing power, there are many illustrative examples on the Internet, especially often on the pages of gold dealers, of course. The reference to ancient Rome is very popular. Over 2000 years ago, one ounce of gold is said to have been enough to buy a high-quality garment there: tunic and toga, with or without sandals, depending on the source.
Those who cash in their Krugerrand or Vienna Philharmonic today will get a good 1,500 euros for it. That should be enough for most investors to buy a chic dress or suit and a pair of sensible shoes. So if the next financial crisis shakes the world, investors with gold in their portfolios will at least be well dressed.
More: How well does gold really protect against inflation?