Gold has been known as a great hedge against inflation. When inflation rises, most people are expected to flock to gold but should this always be the case. Some experts believe that it shouldn’t be, that inflation might be a serious concern but it should not necessarily be the only reason investors buy into gold. A closer look at inflation and the gold price might prove that there is no real relationship between gold and inflation on a month to month basis. In the 1970’s the cost of living rose to unprecedented levels and gold rose. However, the price of gold continued to rise in the beginning of the 2000s even though inflation levels had leveled off.
Recently, the price of the yellow metal rose with inflation but some would experts argue that it isn’t rising fast enough or high enough. Consumer prices have risen above 8.5% which is the fastest price hike since the 1982 recession. According to the World Gold Council household demand for bullion coins and bars doubled during the first quarter of this year when compared to the 5-year quarterly average. In the U.S alone, the net gold accumulated by households rose by 83%.
On the other side of the pond, UK prices jumped by 7% per year, the fastest rise in the cost of living in 3 decades. The gold and coin and small bar demand in the UK went up less sharply that it did in the U.S. It increased by only 22% from the previous 5-year first quarter average. Gold dealers like BullionVault have noted that UK sellers liquidated 5 times the amount of gold they had bought in the first quarter of 2017 – 2021.
In Europe, German households saw the price of gold jump by more than 12% in the first 3 months compared with the average attained in the first quarter of 2021. However, the demand for gold has grown faster than it has in the UK by a third. The demand for gold in Germany grew even higher than that of the UK and even grew faster amongst US consumers by 92%!
As far as weight is concerned, Germany’s demand for gold has outweighed the demand for gold in the US between January and March in 2022 in the coin and small bar market.
To put this into perspective, consider that Germany’s population is only a 1/4th of the US. It also has a per capita economic output that is 30% less than the US. Still it has managed to outweigh the demand for gold by two-thirds over the last 5 years. Germany has outperformed or outweighed the U.S’s gold coin and small bar demand every quarter since 2016.
Why? The answer lies in the economic policies and the traits that underline investment decisions. It might be hard to explain but if you watch the trends and how the gold price moves in relation to them you might have a better insight. What it boils down to when comparing the correlation between the gold price and inflation- Germany has gone through something that definitely supercharged the country’s demand for gold.
Having said all that, the fact still remains that people who want a safe haven turn to gold when inflation goes up but they are propelled by different things for different people in different countries across the globe. Buying gold in inflationary times might widely be promoted but things aren’t always as cut and dried. The bottom line is that it is better to have gold in your investment portfolio than to have all your eggs in one basket.
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