– Information from Core Bullion Traders.
It may seem logical to think that when inflation goes up, the price of gold will go up also. There is a correlation between inflation and gold, as gold can be lifted by high inflation. Gold prices might go up when asset holders flock to the precious metal and in doing so drive up demand amid fears of inflation going up. Yet inflation and gold don’t move in a lockstep fashion, although you might see the inflation rate and the price of gold rise or fall at the same time.
With inflation in the UK having jumped from 2% in July to 3.2% in August (according to the latest data from the Office for National Statistics – ONS). The jump puts inflation at the highest rate since March 2012 and according to the ONS is “the largest ever recorded increase” in inflation since records began back in 1997.
What Is Inflation?
Inflation refers to a general spike in the prices for goods and services such as food, fuel, clothing, transport and housing. Put simply, if you get 1 basket of shopping for €150 – and inflation rises by 5% – then that exact basket of shopping will now cost you €157.50. This may not seem like a massive jump or expense, but now put it in terms of cash you may have in the bank; if you have €8,000 in ‘cash’ in your bank account – and inflation rises by 5% – the ‘real’ purchasing power of that money is now only approx. €7,600. So how do you protect your money against inflation?
Diversify Your Portfolio
Diversifying your portfolio is not only a good way to protect your finances against inflation, but it is something that anyone who invests, should consider. By diversifying your portfolio, you are spreading risk and helping to ensure you have a ‘hedge’ against unforeseen circumstances and financial crisis.
Research published by the World Gold Council after the height of the financial crisis shows that when central banks leave interest rates too low for too long or pump too much money into the economy, they risk triggering a sharp uptick in the inflation rate. If the inflation rate goes up, the Council notes, then traditional inflation hedges like gold, commodities, real estate, and inflation-linked bonds “are likely to outperform other mainstream financial assets.”
The bottom line is that gold can be a hedge against inflation and diversify a portfolio during good and bad times.
“My thesis for thinking that gold makes sense within a portfolio rests on this idea that the Federal Reserve will choose to overshoot, rather than risk deflation. The risk of inflation is far more palatable than any deflation,” Tim Shaler, chief economist at iTrustCapital, claimed in June 2020. “If somebody is concerned about future inflation, then gold is an appropriate part of somebody’s portfolio.”
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Disclaimer & Copyright 2021
Although every effort has been made to undertake this work with care and diligence, Core Bullion Traders do not guarantee the accuracy of any forecasts or assumptions. Nothing contained in this presentation constitutes an offer to buy or sell securities or commodities and nor does it constitute advice in relation to the buying or selling of investments. It is published only for informational purposes. Core Bullion Traders does not accept responsibility for any losses or damages arising directly or indirectly from the use of this presentation or data.