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Inflation’s Impact on the Price of Gold in 2021

September 9, 2021
by Leon Marshall,

Article Recap

Gold is quite often seen as a hedge against rising inflation, mostly because it is a relatively stable asset.

The Age of inflation is coming, or so many believe. This has traders and investors on their toes while the Federal Reserve believes it to be merely transient. Former chairman of the Board of Governors of the Federal Reserve System, Alan Greenspan once said:

“Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”

The price of gold went down by 6.6% in the first half of 2021. It started to gain traction again during Q2, only to be thwarted by a significant pullback in late June. The price of the metal was especially affected by higher interest rates in Q1, and then again in late June.

When did it all start?

1971 marked the beginning of the Age of Inflation. This is when the United States welcomed the fiat money system after decoupling the US dollar from gold. Since then, gold has gone up by 4,500% and stocks have gone up by 3,375%. In comparison, the US dollar has lost 85% of its purchasing power in the same amount of time.  

Analysts see gold as an opportunity, as have Roman emperors before them, who managed to preserve their wealth by turning monetary assets into gold. Ross Norman, a London-based analyst, says it is the “mother of all buying opportunities”. He points to the value of gold increasing substantially, although it would be “artificially constrained”. However, that is but one of the ways to view the result of inflation in 2021 and its effect on the world economy.

Neil Howe, the author of the 1997 classic “The Fourth Turning”, is of the opinion that “like Nature’s four seasons, the cycles of history follow a natural rhythm or pattern”. The US’s current cycle “began in 2008 with the Global Financial Crisis and the deepening of the War on Terror, and will extend to around 2030.

What are the experts saying?

The Financial Times’ Robert Armstrong is of the opinion that gold is an “obvious candidate” as a hedge against rising inflation as it is the asset with the “one of the most stable relationships to economic fundamentals.Goldseek referred to president Biden’s administration as that of a “policy mix” which “is an attempt to overturn the framework that has been in place since the early 1980s – what the Reagan-Volcker team were to disinflation the Biden-Powell team might be to inflation.”

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Turbulent times

WisdomTree’s research head, Jeremy Schwartz, predicts higher inflation within the next 5 years. A possible cause could be the COVID-19 relief measures that have seen around $6-7 trillion USD being pumped into the economy. This crisis, alongside rising money velocity, seems to point to a sharp increase in the M2 money supply in the US over the past year. 

There is a substantial amount of risk if there is permanent inflation, as Schwartz pointed out:

“If inflation is much higher than people expect, that’s where you start to look for other diversifiers. And that’s where we think things like commodities could have a big role.”

In 1982, Theodore H. White wrote in “America in Search of Itself”:

“Inflation has no date of beginning. Inflation is the cancer of modern civilization, the leukemia of planning and hope”.

Undoubtedly, inflation affects everyone in the economy and has, on various occasions, brought the world’s economy to its knees. Looking forward, it will be interesting to see how gold will continue to stack up as an inflation hedge.

The bottom line

Trading gold CFDs is a way to take advantage of its price movements without investing in the underlying asset itself. The underperformance of gold in June 2021 points to a need for “a catalyst to re-energize the market”. Additionally, TD Securities strategies say that “the lack of impetus to buy the yellow metal in the aftermath of the FOMC continues to suggest the bar is low for continued weakness.”

The new mutation of the COVID virus might also be a potential threat to global recovery. The Bannockburn Global Forex chief market strategist Marc Chandler, in contrast to the Fed’s dovish outlook, sees gold as an opportunity to have “the clearest reaction” coming from the forex market where “the dollar is bid.”  

In such times where foreign exchange currencies such as the USD, precious materials and other commodities are on the verge of a potential historical spike, considerations have to be made in regard to trading either gold or forex. Eightcap offers competitive spreads and is regulated in multiple jurisdictions. Creating an account is simple and you can learn the ropes on a demo account first before taking the plunge and going live.

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Trading on margin is high risk.

All times are AEDT.