Inflation is one of the most important aspects of the economy for consumers. When inflation rises, we can buy fewer goods and services with our money, thus losing purchasing power, which worsens our quality of life. This feared rise in inflation benefits gold since it increases demand for the precious metal by helping to reduce its impact on the economy. Buying gold bars or investment coins then becomes an excellent option as a method of protection against inflation.
Taking into account the doubts that the relationship between inflation and gold generates, below, we want to explain in detail what exactly inflation consists of, what are the expectations for the coming years and how gold can help against it.
What Is Inflation?
Inflation, in economics, consists of the general and sustained increase in the prices of goods and services on the market in a country, for a certain time. It is usually around a year. This rise in prices means that with the same monetary unit, we can acquire fewer goods and services. In short, inflation is the visible consequence derived from the devaluation of the currency.
How Is It Measured And What Causes Inflation?
To correctly measure inflation, the increase in the price of a weighted basket of goods and its annual variation is used, through the Consumer Price Index (CPI). There are several levels of inflation:
- Moderate: less than 10% per year.
- Galloping: two or three digits.
- Hyperinflation: higher than 50% per month (close to 13,000% per year).
What leads to the increase in inflation, among other things, is the increase in the price of raw materials, the increase in demand for goods, or the forecast of the rise in prices. There are numerous causes.
How Gold Protects Against Inflation
Faced with rising inflation, the main consequences are the devaluation of the currency and the loss of purchasing power of consumers. In this threatening environment, investors try to find means that allow them to protect their assets as much as possible. This is where gold plays a relevant role since it performs better than other assets in periods of high inflation. In periods of low inflation, moreover, gold tends to appreciate.
With this in mind, if an investor wants to preserve capital, buying gold has always been the best way to go. What advantages does the golden precious metal bring when inflation grows?:
- It allows for diversifying the investment portfolio.
- It protects against what is known as “tail risks” or tail risks”. These are events that are not very likely to occur, but that affect the investment portfolio.
- It offers more liquidity than other assets such as stocks or bonds.
- It protects the investment portfolio both in times of high inflation and in times of strong deflation.
- It also protects against the risk of currency devaluation.
If inflation is out of control over the next few years, the risk of owning gold is minimized. Any consumer or small investor can bet on acquiring physical gold to protect themselves from inflation and the loss of purchasing power.
In the current situation, taking into account that we are coming from a major health crisis, everything points to the fact that as we begin to come out of confinement and vaccines advance, the economy is recovering, which means that over the next few years we will see an increase in inflation levels.
