Inflation threatens: Gold as a hedge for one's own assets

Inflation threatens: Gold as a hedge for one's own assets © Own image

Due to the pandemic and the measures taken against it, we are already in an economic recession. The economy in virtually all industrialized countries collapsed last year and negative growth is also threatening in 2021.

States and central banks are actively trying to counter this crisis, pumping unimaginable amounts of money into the economic cycle and keeping interest rates further below zero. As a result of these measures, inflation threatens to destroy the assets of ordinary citizens.

What does inflation mean anyway?

Inflation describes a general increase in price. Goods and services become more expensive, or the purchasing power of money decreases. In short, the money in the stock market or in the bank becomes worth less. Inflation can be actively controlled by the central banks. This is because central banks control how much money is in circulation through their interest rate and monetary policies. The larger the money supply and the lower the key interest rates, the higher the risk of inflation.

While maintaining price stability is the primary goal of many central banks, such as the European Central Bank ECB, slight inflation (official target inflation rate 2%) is quite desirable in the process. After all, economists fear the opposite of inflation, deflation, even more. When prices fall, consumers and companies push their purchasing decisions further and further into the future in the hope of even lower prices.

Crisis and inflation

To counteract the financial and sovereign debt crisis after 2008, the U.S. Federal Reserve and the European Central Bank have ushered in an era of ultra-loose monetary policy and low interest rates.

The aim is to make it unattractive for commercial banks to leave money with the central bank by setting key interest rates at zero and negative interest rates. Instead, companies and consumers should be able to borrow cheaply, which should stimulate the economy and keep it running.

Through government rescue and stimulus programs, states pumped and continue to pump enormous amounts of money into the market.

The low interest rate policy and the inflation of the money supply (quantitative easing) are being used as a tool against the crisis. However, this also increases the risk of inflation.

Corona crisis: recession and inflation

The ECB, the Fed and others have been pursuing their interest rate and monetary policy for more than a decade now. There have always been cautionary voices warning of inflation. Nevertheless, this scenario has not yet materialized. What is different now?

After the financial crisis of 2008 and the euro and sovereign debt crisis - which mainly affected the European southern countries: Greece, Spain, Italy & Portugal - monetary and interest rate policies actually helped "turn the tide".

After that, however, they did not dare to end this type of monetary policy again: Money remained cheap. However, the money flowed less into the real economy than it was used by investors to invest on the stock market.

Because the "surplus" money flowed primarily into the financial market and did not reach the masses of people, inflation also remained within limits.

As a result of the Corona crisis and the measures taken to counteract the pandemic, we are now back in a recession. And once again, states and central banks are pumping enormous amounts of money into the economy. However, this time not in the form of loans, but increasingly in the form of direct grants, subsidies and cash in people's accounts. With the clear aim of keeping consumption going (= "helicopter money").

If this money actually flows into consumption, inflation is also likely to come.

The central banks are creating a lot of money by cranking up the printing press, which can also be seen in the total money supply (M3). In the USA, the volume of money increased by a quarter in 2020 alone. And in Europe, too, the money supply has multiplied from around 4 trillion euros (end of 2019) to 11 trillion euros (end of 2020).

What does inflation mean for savers?

For the ordinary citizen, inflation means that monetary assets lose value over time. As soon as the banks - some of which are already doing so - pass on the negative key interest rates to savers as well, the money in the account loses even more value.

For the classic average citizen with assets in a savings account, this means a creeping expropriation.

When money loses purchasing power, it is necessary to save what can be saved. To protect their own assets, savers and investors can invest in tangible assets: In addition to real estate, these include precious metals such as gold and silver.

Gold is considered the most stable currency of all. Gold is therefore suitable as "economic self-defense". A defense against the devaluation of your monetary assets.

Especially in times of advancing demonetization, gold offers security and serves as an inflation anchor.

Unlike with money, with a certain amount of gold you can afford the same today as you could a hundred years ago: A well-known example of this is a high-quality two-piece men's suit - Today, 50, 100 or even 150 years ago, you always got a good men's suit for the equivalent of 1 ounce of gold.

Gold Price & Inflation

In times of increased inflation or even when there is an increased risk of inflation, investors are increasingly taking refuge in the safe haven of gold. Accordingly, the gold price rises additionally due to this increasing demand.

In addition, the stable value of gold alone, in contrast to the loss of purchasing power of the euro or the dollar, changes the relationship between the currencies and the gold price.

It can therefore be expected that the price of gold will continue to rise in 2021 and in the coming years. For example, analysts at the major bank Goldman Sachs expect the price of gold to reach $2300 this year, while the gold bar manufacturer Argor-Heraeus anticipates a gold price of $2200.

In their "In Gold We Trust Report 2020", the two gold specialists from Incrementum, Ronald Stöferle and Mark Valek, also anticipate a "golden decade" and, in the long term, conservatively estimate that the gold price will be around USD 4,800 in 2030.

With an investment in gold you are in any case always on the safe side! Due to its limited availability, gold has been a lasting value for many centuries. You can rely on that!

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