With gold also against stagflation

With gold also against stagflation © Joe Dudeck / Unsplash

High inflation rates coupled with a weakening economy: the spectre of stagflation is once again haunting us. But with physical gold in your portfolio, you should be well protected even in these times.

What does "stagflation" mean?

Stagflation is the term used to describe a phase in which high inflation coincides with a period of economic weakness.

Euro Goldmnze 2013From a fiscal and economic policy perspective, stagflation poses a dilemma: loose monetary policy with low key interest rates provides the economy with "cheap money," but further fuels inflation. A tighter monetary policy with an increase in key interest rates, on the other hand, counteracts inflation but always threatens to choke off the economy because there is no money for necessary investments.

The last stagflation phases occurred in the 1970s and 1980s, when the oil crisis caused double-digit inflation rates and economic growth in the industrialized countries even slipped into negative territory in the meantime. However, the price of gold rose sharply during these phases.

Current: High inflation and risk of stagflation

As early as the summer of 2021, various analysts warned of the threat of stagflation after the rising inflation rates since then were joined by disappointing economic data.

While years of loose monetary policy have been largely responsible for inflation, it is mainly disrupted supply chains in the wake of Corona that are holding back the economy.

In addition, the Ukraine war and the sanctions against Russia have added another dimension: Above all, bottlenecks and horrendous prices in the energy sector are the result. In addition, other areas, from the food sector (wheat, fertilizers, ...) to the high-tech industry (semiconductors, noble gases, ...) are massively affected by the crises. A

The ECB also sees signs of a stagflationary phase in Europe:

"There are scenarios of a coming stagflation. [...] It will depend, of course, on the duration of the conflict and the more or less concerted response (in fiscal policy) of the Europeans."
- Mario Centeno, ECB Governing Council member

The war in Ukraine will therefore probably not only have a negative impact on economic growth, but could also further delay a change in European monetary policy. It is also difficult to say at present to what extent the Fed, which has already initiated the interest rate turnaround in the U.S.A., will be able to maintain its planned course.

Gold price and stagflation

During the stagflation in the 1970s, gold was one of the strongest assets and outperformed other asset classes. Therefore, it can be assumed that stagflation would again be a positive scenario for the gold price in 2022.

It can be assumed that gold performs so well in a phase of stagflation because its role as a "safe harbor" and inflation anchor allows it to benefit from a more unsettled economic situation, high inflation rates and falling real interest rates.

"As long as we don't see positive real interest rates of 2 to 3 percent, gold will work"
- Ronald Stöfferle

As long as real interest rates remain low, the "foundation for future advances in the gold price" is set, argues gold expert Ronald Stöfferle in the Wiener Zeitung. In the medium term, Stöfferle expects new all-time highs in the period of 12 to 18 months and a rise to up to 2,300 dollars per troy ounce.

Conclusion: Well equipped with gold

1 Ounce Vienna PhilharmonicThe longer the war between Ukraine and Russia lasts, the more massive the impact on the global economy will be. It can be assumed that the states and central banks will have to continue to support their economies massively in order to cushion these consequences.
It is therefore questionable whether the central banks will stick to the rapid change in monetary policy that has been promised, at least by the Fed. Even if key interest rates are raised, the question is whether they can quickly put a stop to inflation.

However, anyone who has hedged part of their assets with physical gold can consider themselves well equipped. Gold as a safe haven and its quality as a store of value is probably one of the best ways to protect assets from loss of value in the long term.

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