The Limited Times

Now you can see non-English news...

Crisis-proof investment: How gold protects your money from inflation

2022-02-09T07:34:39.105Z


In view of stock market turbulence and high inflation rates, the demand for gold investments is high. The precious metal has recently failed to provide evidence of its crisis qualities - but staying power is crucial for investors.


Brilliant views:

Gold is considered a good wealth hedge against inflation

Photo: Sven Hoppe/ dpa

You can rely on the reflexes of investors.

As soon as things get turbulent on the financial markets, they turn to the "safe havens".

Gold in particular is then usually a sought-after investment - as it is at the moment.

The long-term upward trend on the stock exchanges has recently come to a standstill.

The omicron wave of the corona pandemic, supply bottlenecks in many sectors, rising inflation rates and central banks suddenly thinking about higher interest rates are all making investors nervous.

Equities are therefore not necessarily in trend at the moment.

Gold, on the other hand, is in demand.

According to the World Gold Council (WGC), exchange-traded funds (ETFs) in gold recorded net inflows totaling US$2.7 billion worldwide in January.

This corresponds to a quantity of 46 tons of the precious metal and was the strongest increase in funds since May 2021. The industry association also reports strong demand for physical gold, especially in China and the USA.

At the turn of the year, the news had already made the rounds that interest in the well-known Krugerrand gold coin was greater in this country than it had been for a long time.

Above all, the increased inflation rates should drive investors to gold.

Because the precious metal has always enjoyed a reputation as a good protection of assets against currency depreciation.

In the euro zone, the inflation rate recently rose to 5.1 percent.

In the USA it is already 7 percent.

Neither consumers nor savers have experienced such rates of price increase for decades.

But does gold actually help to avoid asset losses due to inflation?

The precious metal's recent price action may raise doubts.

In January, for example, the price of gold, which is currently a little over $1,800 an ounce, was more or less stationary.

The same applies in retrospect for the full year 2021: the price of gold fluctuated significantly over the course of the year.

Ultimately, however, there was no question of a price increase in line with the inflation rate.

On the contrary: the price of gold even fell slightly in 2021.

However, this does not invalidate the thesis that gold protects against inflation.

A single year is hardly sufficient for this.

More like a bird's-eye view.

The World Gold Council, for example, refers to the period since the early 1970s when the Bretton Woods system ended and the US dollar was unpegged from the precious metal.

Gold prices in dollars have risen an average of 11 percent a year since then, according to the WGC.

Gold has not only overshadowed numerous paper currencies such as the dollar, euro or yen.

The precious metal also outperformed many asset classes.

And above all: the performance over the long period is on average also above the inflation rates in the USA and worldwide.

"In the long term, gold has retained its purchasing power," summarizes

Martin Siegel

, precious metals expert and managing director of the Stabilitas investment company.

"Since the price of gold has fluctuated freely since 1968 and is subject to speculative investor interest, it does not increase exactly in line with the loss in purchasing power of paper money, but fluctuates around the loss in purchasing power. The price of gold sometimes leads and sometimes lags behind the loss in purchasing power."

Thorsten Polleit

, Chief Economist at Degussa Goldhandel, takes

a similar view .

Goods price inflation, i.e. the continued rise in the prices of goods and products across the board, is a monetary phenomenon, he explains.

It is caused by the expansion of the money supply by central banks and commercial banks.

"Unlike today's unbacked currencies, the amount of gold cannot be increased through arbitrary political actions," says Polleit.

"The purchasing power of gold can therefore not be reduced by monetary policy."

As evidence, Polleit refers to various periods in the past during which the precious metal has proven its quality.

For example in the 1920s, at the time of hyperinflation in this country.

"In 1871, 4.20 German marks equaled one gold-backed US dollar, and an ounce of gold equaled 20.67 US dollars," says Polleit.

"In November 1923, at the peak of German hyperinflation, you ultimately had to pay 4.2 trillion marks for one US dollar or one troy ounce of gold. So gold was a protection against inflation at the time."

Polleit's second example: between the end of 1971 and January 1980, the price of gold rose from $43 an ounce to more than $800 an ounce – an increase of 1760 percent.

"US consumer goods prices rose by a total of 96 percent during this period," says the economist.

Investors are eyeing central banks

However, investors are currently realizing that simply looking at inflation rates is hardly enough.

Rather, it is also crucial how central banks react to it.

With their monetary policy, central bankers influence interest rates and exchange rates – both of which are also important factors influencing the price of gold.

This was evident in January of this year, for example.

The price of gold started the month with decent gains, apparently influenced by the severe turmoil in the stock markets.

On January 26, however, the US Federal Reserve made a statement on its future monetary policy - and indicated that more severe interventions would be expected than previously thought.

Consequence: The price of gold then went down steeply.

The logic behind it: If inflation rises, investors turn to gold to protect their assets against possible losses.

At the same time, however, central banks are also beginning to counteract price developments by raising interest rates.

Rising interest rates, in turn, tend to weigh on the price of gold because they make interest rate investments more attractive as an alternative.

A rise in interest rates in the USA is particularly painful, as can be observed at the moment.

Because this also strengthens the US dollar – and thus makes gold more expensive for buyers from non-dollar countries.

Gold goes up when the dollar goes down and vice versa is a gold market rule of thumb.

Real interest rates are crucial

However, it is also a fact that interest rates are gradually rising at the moment.

However, they are still at a historically low level, far below the rate of inflation.

This means that real interest rates are often negative, so investors with interest investments are currently still suffering asset losses.

There can therefore hardly be any talk of attractive alternatives to gold investments at the moment.

How effective gold's protection against inflation is also depends on how high the inflation is, says Degussa economist Polleit.

"With inflation of, say, 2 to 4 percent, gold usually protects the investor from the loss of purchasing power of the official money. But then, for example, equity investments often achieve higher returns, so they are a comparatively better protection against inflation."

(Read here what you should know about stocks as a hedge against inflation.)

On the other hand, when inflation is higher, especially in the case of high inflation and hyperinflation, the situation is different.

Then companies go bankrupt by the dozen, and owners of rented properties are also at a disadvantage, according to Polleit.

However, physical gold often proves to be "one of the last safe havens" in these times.

Enlarge image

"I expect the price of gold to rise sharply":

Precious metals expert

Martin Siegel

is optimistic

This statement also corresponds to figures from the WGC.

Accordingly, the price of gold rose by an average of 14 percent per year in years with inflation rates of more than 3 percent, i.e. even more strongly than the long-term average.

According to the industry association, the higher the inflation, the greater the rise in the price of gold.

Gold has therefore not only protected wealth over the years, but even helped to increase it.

The question remains as to how the price of gold will develop in the future given the rise in inflation and the expected central bank decisions.

"The price of gold is on a long-term upward trend," says expert Polleit.

"In addition, I consider the price of gold at $1,800 an ounce to be significantly undervalued. In my view, it currently represents an attractive insurance option with significant potential for price increases."

Precious metal expert Siegel is also confident that things will continue to improve.

"I expect the price of gold to rise sharply," he says.

"Since mid-2020, the price of gold has lagged behind the increase in money and is thus building up catching-up potential. The turnaround in interest rates should accelerate the rise in the price of gold significantly, since the bonds will come under pressure due to falling prices when interest rates rise and investors will have to leave these markets to avoid price losses to avoid."

Siegel hopes that some of the money released should also be invested in precious metals.

He has therefore set himself a rather ambitious goal: "My preliminary gold price target is between 2,300 and 2,500 dollars per ounce."

cr

Source: spiegel

All news articles on 2022-02-09

You may like

Trends 24h

Latest

© Communities 2019 - Privacy

The information on this site is from external sources that are not under our control.
The inclusion of any links does not necessarily imply a recommendation or endorse the views expressed within them.