Until recently, gold was seen as a safe haven against inflation. It is also seen as a hedge against macroeconomic shocks and financial crises. But in today’s environment, gold isn’t proving to be a reliable inflation hedge or a safe haven.
A look at the past two years shows gold prices have traded sideways to down. Gold’s decline has been accompanied by a rise in the price of stocks and bonds. These markets have fallen alongside gold since March.
The US Federal Reserve has tried to reduce inflation by raising interest rates. But these interest rate increases have been modest and painless. The market hasn’t been able to determine if the Fed’s efforts have been successful. Meanwhile, other monetary authorities haven’t stepped up their inflation fighting efforts.
The US dollar is still the dominant reserve currency. But it has lost a lot of its purchasing power over the past century. As a result, it has become a more unstable currency. Inflation has re-awakened across the globe. The consumer price index (CPI), a widely used measure of inflation, has hit 40-plus-year highs in June. In April of 2021, it was up 4.2% year over year.
The last time the US had an out-of-control inflation was in the 1970s and early 1980s. Energy shortages drove inflation to 8.8% in 1973 to 1979. It has since averaged around 6.8% annually. But inflation is still rising and will probably continue to do so. While inflation hasn’t risen to the level of the 1970s, the Fed’s inflation target is still a low one. As a result, inflation-sensitive assets like gold will have a tough time rising.
When inflation rises, government bonds become more attractive. Historically low interest rates have made holding gold more affordable, but gold’s price has been unable to follow suit. This has created an opportunity cost. In order to profit from gold, investors need to hold it for a long period of time. This can also create opportunities for scammers, especially when there is a lot of volatility in the market. If gold falls, investors could lose a lot of money.
Gold has become more of a risk asset in recent months. It’s been more likely to move with the ups and downs in the stock and bond markets. But gold’s downtrend remains. If the Fed’s inflation fighting efforts fail, gold’s fortunes could rebound. But until then, gold’s inflation hedge is not effective.
Investors who buy gold are looking for a safe haven in the event that the stock market crashes. In the event of a recession, inflation-sensitive assets like gold don’t make much sense. In addition, the Fed’s inflation target hasn’t been tested this way before. As a result, it’s hard to determine whether gold will perform well in the future.
Regardless of whether gold is a safe haven or an inflation hedge, the truth is that inflation is a problem. As long as consumers can’t afford the higher prices, the inflation problem will continue. Increasing borrowing costs will have a real effect on consumers and businesses