Inflation’s Impact on the Price of Gold in 2021
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.
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.”
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:
In 1982, Theodore H. White wrote in “America in Search of Itself”:
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.”
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