Gold price strengthens as inflation looms

Inflation is pushing up construction costs and consumer prices

The gold price often moves inversely to the US dollar

It’s no coincidence that as consumer price inflation in the US registered at over 4% for the first time in a long, long time, gold ticked up in value.

The gold price isn’t quite up towards where it was at the end of last summer, pushing records, but it’s recovered a lot of the ground lost in the early part of this year when investors sensing that economic recovery was on the way switched out of their safe-haven assets.

They’re moving back into them now, but for different reasons.

For the past 12 months or so, gold has benefited from two related dynamics. The first is the fear factor related to the virus itself. In times of economic or political or social uncertainty, investors switch out of riskier assets and into safer ones like gold.

So far, so good.

This time round, that switch into gold was exacerbated by the unprecedented money-printing programme that has been embarked upon by the US government. US$6tn of stimulus money has already been allocated, and some analysts think President Biden’s largesse might eventually reach as high as US$10tn.

That’s a lot of dollars competing with each other as a store of value, and as most market participants are now recognizing the more money you print, the less it’s worth.

And there’s a multiplier effect as far as gold’s concerned. First off, if dollars are worth less, the gold price will adjust, and in dollar terms at least, be worth more. But secondly, if dollars are worth less, everything else will be worth more too. And if you flip that statement around, what you get is the inflation that we’re now seeing. The circle thus completes: gold as a store of value acts as a hedge against inflation, and all of a sudden becomes more desirable again, even at a time of apparent economic growth.

Because there’s no doubt the US economy, and with it that of the wider world, is back in growth mode. The real question now isn’t whether there’ll be a recovery, but whether the powers that be in US government and at the Fed can keep it in check. So far the authority figures in question are reluctant to go against previous pronouncements against rate rises. But the longer inflation is allowed to build up a head of steam, the worse the problem will become – the multiplier effect again, in terms of a bull case for gold.

So what will happen? That’s hard to say exactly, but having let the toothpaste out of the tube, neither the Fed nor the US government is going to get it back in again. US treasury bonds are likely to decline in desirability, and that in turn could heap the pressure for repaying the unprecedented debt that the US has built up over the past 12-18 months onto the taxpayer.

That certainly won’t go down well in a country where people have been forced this way and that by constantly changing big government rules during the crisis. Expect pushback and uncertainty, and accordingly, further pressure on gold.

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