The gold bulls have always suggested that the yellow metal is a must have during periods of heightened inflationary pressures. Some have even called gold the ultimate hedge against inflation and the yellow metal has certainly seen some strong buying interest in recent months as inflationary pressures in the U.S. have perked up quite a bit.
The question though, is what makes gold an effective hedge against inflation? Does the metal perform some type of magic that instantly erases inflation or its effects? Does gold suddenly make inflation non-problematic? Of course not. The gold coins and bars that are bought on a widespread basis in fact have no magic nor do they perform any tricks, not in the literal sense of the word anyway.
The “magic” that gold does have, however, is simply its ability to maintain its purchasing power and to rise in price as the prices of everyday goods and services rise. Gold, in fact, can hold its value as it rises alongside everything else during periods of heightened inflation. A paper dollar, on the other hand, will lose much of its value during such periods as each dollar will then buy less and less goods and services. Put simply, that is the difference between gold and silver during inflationary periods.
It is also the exact reason that you must hold physical gold if you want to survive bouts or rampant inflation.
The story of inflation in the U.S. has been an interesting one. Until this year, the Federal Reserve has been unable to create inflation despite its many rounds of QE and its holding of interest rates at or near zero. For years, the Fed was unable to spur any price pressures. Now, finally, the central bank may have achieved part of its objectives. Growing inflation means a growing economy, and the economy has shown strong signs of recovery even from the ongoing Covid-19 pandemic. This recovery phase is now being called into question, however, as the Fed symposium this week in Wyoming may provide clues about the Fed’s intentions to begin removing stimulus measures. The debate about what the Fed may or may not do is ongoing, and will continue even after the symposium this week.
Whatever the central bank decides or does not decide to do, there are plenty of other reasons to also own gold. Dollar weakness, geopolitical uncertainty and a potential top in stocks are all good reasons for investors to consider alternative asset classes such as gold. Considered by many to be the only true form of money left on the planet, the value of gold is likely to rise further, in fact much further, as it becomes increasingly desirable for investors.
The case for ongoing inflation remains unclear. Whether prices rise further or not, however, is not the primary reason to consider a large allocation in physical gold. If you take an objective look at the global economy, Fed policies and sovereign debt issues, you will likely determine that gold is a must have for your portfolio. Now may be the ideal time to start acquiring it too, as recent price levels may not be seen again once the yellow metal takes off.