Gold is greatly valued nowadays not just for investments and jewellery making but also for producing electrical and medical gadgets. Gold was above $1,700 per ounce (as of March 2021), significantly from levels under $100 recorded 50 years earlier and down more than $300 from September 2020.

High inflation will boost gold.

With severe inflation on the rise, demand for gold investments should skyrocket, driving gold even higher. Contrarian investors are baffled by this, as it has recently significantly underperformed rapidly growing overall price levels. However, history contends that this oddity won’t endure and that gold will soon experience significant inflation. The tremendous Fed money production driving today’s horrific inflation super-spike is the first since the 1970s when gold increased dramatically. The Consumer Price Index is the most extensively used inflation indicator in the US. The CPI’s history dates back to 1913, even though its elements and calculating techniques have undergone numerous changes. 

Before April 2021, the monthly headline CPI experienced an average of 1.7 per cent year-over-year increase. Even with pandemic-lockdown disruptions, there wasn’t a single 4 per cent Plus print during that period. But something shifted in April 2021 when the CPI unexpectedly raced up 4.2% YoY. That turned out to be its most popular read since September 2008, following the catastrophic stock panic of that year. The Fed itself attributed supply-chain disruptions as the cause of the rising inflation. In its statement on monetary policy, the Federal Open Market Committee claimed that “inflation has increased, mostly reflecting transitory causes.” Because money supply growth rates are orders of magnitude higher, the global above-ground gold supply only increases by about 1% annually. 

As a result, comparatively much more money is available to raise the price of comparatively much less gold. Gold will eventually reflect that monetary excess. Therefore, the Fed doubling the US-dollar supply in only a few years is extremely optimistic for gold. However, since the predicted increase in gold’s price adjustment hasn’t yet occurred, contrarian investors still have a fantastic opportunity to acquire the yellow metal. It is the first super-spike in inflation since the 1970s, and gold is trailing. 

The huge inflation today will ultimately increase demand for gold investments and raise gold prices significantly. This unprecedented QE4 money production by the Fed is to blame for the first super-spike in inflation since the 1970s. That caused the US dollar supply to double in just a few years, driving up overall price levels tremendously! Even at full speed, half-unwinding QE4 will take more than two years, while QT2 is just getting started.

Make this wise purchase when the economy is in upheaval, and there is inflation.

Gold won’t provide the same returns as stocks as an investment. Still, Jim Cramer, host of CNBC’s “Mad Money” and Investing Club, claims it can help combat increasing inflation. The rarity of gold as a commodity and its long history as a reliable medium of trade gives it its value. When there is economic uncertainty and excessive inflation, gold prices typically increase. The current year-over-year inflation rate is 8.6 per cent, significantly higher than the benchmark target rate of 2 per cent set by the Federal Reserve. 

The central bank has further increased interest rates, making borrowing money more expensive to curb inflation. The S&P 500 index officially entered the bear market and is now down more than 20% from the year’s start. Additionally, gold can be a safe-haven asset: Since the returns on gold and stocks are typically inversely correlated, gold prices typically increase as stock prices decline.

Gold prices will be dramatically undervalued if inflation doesn’t decline quickly.

The increase in inflation has mostly caused this year’s market volatility. Therefore, if rapidly growing price pressures swiftly subside, returning inflation to below 2 per cent, then perhaps this year’s market movements will be remembered as “full with sound and fury, meaning nothing,” to paraphrase Shakespeare. Certainly, despite recent ructions, this is what markets are currently discounting. While gold prices remain relatively low, equity prices are still very high. Typically, rising inflation episodes are the exact opposite.

Final Remarks

We have loved gold for a very long time and probably always will. The recent volatility may be only a precursor to a more severe repricing across various asset classes if inflation proves to be more permanent than markets now discount. The level of CPI shows that gold is approximately as cheaply priced in relation to stocks as it was the last time inflation became an issue. And if inflation stays high, gold prices could see significant gains in the future, especially compared to stock prices.


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