How Does Inflation Affect The Demand For Gold?

Inflation is one of the most important aspects of the economy for consumers. When inflation rises, we can buy fewer goods and services with our money, thus losing purchasing power, which worsens our quality of life. This feared rise in inflation benefits gold since it increases demand for the precious metal by helping to reduce its impact on the economy. Buying gold bars or investment coins then becomes an excellent option as a method of protection against inflation. Taking into account the doubts that the relationship between inflation and gold generates, below, we want to explain in detail what exactly inflation consists of, what are the expectations for the coming years and how gold can help against it.

What is inflation?

Inflation, in economics, consists of the general and sustained increase in the prices of goods and services on the market in a country, for a certain time. It is usually around a year. This rise in prices means that with the same monetary unit, we can acquire fewer goods and services. In short, inflation is the visible consequence derived from the devaluation of the currency.

How is it measured and what causes inflation?

To correctly measure inflation, the increase in the price of a weighted basket of goods and its annual variation is used, through the Consumer Price Index (CPI). There are several levels of inflation:

  • Moderate: less than 10% per year.
  • Galloping: two or three digits.
  • Hyperinflation: higher than 50% per month (close to 13,000% per year).
 
What leads to the increase in inflation, among other things, is the increase in the price of raw materials, the increase in demand for goods, or the forecast of the rise in prices. There are numerous causes.

How Gold Protects Against Inflation

Faced with rising inflation, the main consequences are the devaluation of the currency and the loss of purchasing power of consumers. In this threatening environment, investors try to find means that allow them to protect their assets as much as possible. This is where gold plays a relevant role since it performs better than other assets in periods of high inflation. In periods of low inflation, moreover, gold tends to appreciate.
With this in mind, if an investor wants to preserve capital, buying gold has always been the best way to go. What advantages does the golden precious metal bring when inflation grows?:
• It allows for diversifying the investment portfolio. • It protects against what is known as “tail risks” or tail risks”. These are events that are not very likely to occur, but that affect the investment portfolio.
• It offers more liquidity than other assets such as stocks or bonds. • It protects the investment portfolio both in times of high inflation and in times of strong deflation. • It also protects against the risk of currency devaluation.
If over the next few years inflation runs out of control, the risk of owning gold is minimized. Any consumer or small investor can bet on buying physical gold to protect themselves from inflation and loss of purchasing power.

What Will Happen To The Price Of Gold In 2022?

Gold prices reached all-time highs in 2020, exceeding $2,000 an ounce, due to everything that the health crisis entailed due to the spread of the coronavirus throughout the world. Keep in mind that the yellow precious metal has been an excellent haven asset throughout its history and that it can be sold anywhere in the world.

Currently, we are in a different scene, in full economic recovery. The gold market is in a period of consolidation, which has led to a price that has moved within narrow margins. In 2021 and after the great year that the raw material had in 2020, gold has fallen by 6%, even though the rise in inflation, also by 6%. However, there are good expectations for next year. Will it be positive to buy gold bars in 2022? Next, we talk about some of the forecasts for the price of gold in the nearest future.

Inflation will boost the price of gold

According to forecasts made for Bloomberg by a Goldman Sachs analyst, Damien Couvali, inflation is one of the determining factors that will drive gold in the coming months of 2022. Why is this forecast made? It is believed that the reason gold is expected to rise is because of rising inflation. In October it had an increase of 6.2% and reached levels that exceeded those reached in 30 years.

Gold thus becomes an excellent asset to include in investment portfolios, to have greater diversification and protection against rising inflation. The analyst believes that gold may exceed $2,000 an ounce early next year. Will it be so?

Good prospects for gold over the next two years

A report from Haywood Securities analysts is very positive when it comes to gold and they have interesting forecasts for 2022 and 2023:

  • They expect an average price of $1,850 an ounce in 2022 and $1,900 in 2023.
  • They mention the factors that gold has against it in the short term: the strengthening of the US dollar, and the increase in the yields of treasury bonds due to the new rise in interest rates that is expected in 2022.
  • There are also favorable factors: the slowdown in the recovery and economic growth and the rise in inflation also mentioned above.
  • They affirm that gold has a positive long-term trend, and for this, they rely on positive macroeconomic factors for the precious metal. Gold is a tangible, fungible asset and an excellent store of value for the long term.

Other aspects that may favor gold in 2022

  • The stock market is showing increased volatility. This may support the price of gold as some investors will turn to the precious metal to diversify and protect their portfolios.
  • Gold has underperformed in cryptocurrencies and other assets in 2021. However, it remains a much more stable and safe asset than any of them in times of uncertainty or crisis.

What can we make clear from all this data? The forecasts are positive for the price of gold in 2022, although it must be taken into account that many aspects can affect it. The rise or fall in the price of precious metals depends on many factors. We must think long-term and remember the behavior of gold throughout its history.

How Does The Cryptocurrency Crisis Affect Physical Gold?

The recent drop in the value of cryptocurrencies makes many investors focus on buying physical gold as a better form of investment. Digital currencies were considered last year as one of the star options for retail investors. However, they have suffered a spectacular crash in recent months, and their high volatility makes physical gold more attractive.

For European banks, these types of crypto assets have no value, they do not have an underlying that acts as a security anchor. Many investors do not understand how it works or the impact that such an investment can have on their pockets.

Cryptocurrencies in crisis

As we said previously, cryptocurrencies were one of the most in-demand investment assets throughout 2021. In recent months, investors have experienced first-hand the extreme volatility they have experienced, due to such important aspects as the lack of liquidity offered by central banks, the war between Russia and Ukraine, and the economic crisis, among others. In this way, in the face of inflation that does not stop growing, the rise in interest rates, or war scenarios, investors leave this highly volatile market and look for haven values ​​such as gold.

What happened to cryptocurrencies? To understand why gold once again becomes a haven asset to focus on, we must know some facts about what has happened with the cryptocurrency market:

  • Bitcoin suffered a drop below $26,000 in May. In November 2021, one Bitcoin was worth $67,000. That is, its value plummeted by more than 50% from its all-time highs.
  • The cryptocurrencies that lie in the shadow of Bitcoin have plunged more than 80% from their all-time highs. Luna (from Terra), for example, lost more than 70% of its value, reaching a price of almost $0.
  • Ether, the digital currency of Ethereum, has also plummeted by more than 50% in 2022, and the figure increases notably if we talk from its all-time highs.

According to a study conducted by Hall Partners globally, 32% of users believe that investing in cryptocurrencies is a high risk, with the possibility of high liability, or as “a purely speculative bet.” Only 6% believe that they are a safe investment.

Why bet on investing in physical gold

When it comes to physical gold, the vision that investors have is very different, since they recognize its capacity as a refuge asset, as well as a protective element against the rise in inflation.

According to the aforementioned report, last year more investors trusted the yellow precious metal (44% did so during the first 10 months of 2021 and bet mainly on bars and coins). What other data should we take into account?

  • In 2021 the investment in physical gold reached the highest figure in the last 8 years.
  • Gold is one of the investment assets that has appreciated the most since the beginning of 2021.
  • Of the investors who bought cryptocurrency last year, more than half also bought physical gold.

In a framework without regulation, it is difficult for the cryptocurrency market to stabilize and stop being so volatile. In the context in which we find ourselves, with a digital battle in the middle, a lot of economic uncertainty, and skyrocketing inflation, it is not surprising that many investors are playing it safe and setting their sights on a classic refuge asset such as gold.

Central Banks Will Continue To Increase Their Gold Reserves In 2022

Everything indicates that central banks will continue to be the net buyers of gold in 2022. For them, buying gold is essential, since it is a very important reserve asset, and data from the World Gold Council confirms this. Before delving into the forecasts for the purchase of gold by central banks for the remainder of the year, we want to review the latest figures they have recorded.

Central banks bought up to 20.6 tons of gold last April

We have recent data for April, in which banks recorded purchases of up to 20.6 tons of the precious yellow metal. In contrast, gold sales were lower than in previous months, barely reaching 3.5 tons. They have thus become the net buyer’s par excellence so far this year.

Gold purchases expected in 2022

The data that emerges as a result of the latest survey carried out by the World Gold Council of the 57 central banks that responded are very interesting:

  • 25% of central banks plan to increase their gold reserves in the coming months. Last year 21% answered the same.
  • 80% of the central banks of emerging countries believe that world gold reserves will increase in 2023.

Analysts affirm that the gold purchases planned for the remainder of the year are motivated above all by the growing concern that there is a global financial crisis. Not only that, but other factors lead us to believe this, such as the changes that will take place in the international monetary system, or the increase in economic risks in those economies that have reserve currencies, for example.

The results of the survey also reveal clear differences between the central banks of the most developed economies, and those that are part of developing economies or emerging markets. 25% of these entities that bet on buying gold belong to the latter.

The experts from the World Gold Council point out that the central banks of these emerging countries have more problems when it comes to maintaining order with capital flows and the stability of their currencies. For this reason, they tend to consider gold as a key part of their reserve management strategy, especially at times when they need assets to mitigate risks.

Also, if we go further, gold is expected to increase as a proportion of reserves over the next 5 years.

Gold Price Forecasts for Autumn 2022

Buying gold bars is one of the best options to invest in physical gold today. To do it correctly, one of the key aspects is the price of gold. It is very important to be up to date with all the variations that occur in the price of the precious metal, the rises, the falls, as well as the forecasts made by expert analysts. Taking them into account can make a difference when it comes to finding the most appropriate moment to buy or sell gold, either in the form of coins or ingots.

Gold price could exceed $2,000 an ounce

Although gold comes from chaining several consecutive months of price falls, some analysts are optimistic and point to the possibility of it rising this fall, due to the complications we are experiencing at an economic and financial level. Everything indicates that the precious metal can exceed the figure of 2,000 dollars an ounce, according to forecasts by RBC Capital Markets, a number that the price of gold has not exceeded since March.

Some geopolitical tensions can help in this regard:

  • The ongoing war between Russia and Ukraine.
  • Tensions between the United States and China over Taiwan.
  • Geopolitical difficulties related to the global energy and economic performance crisis.

These points lead to a current of investors who visualize the high risk of the situation and perceive gold as a haven asset.

Forecasts point to two possible scenarios:

  1. A strong dollar and more rate hikes, with gold around $1,679 an ounce in the third quarter, and $1,663 in the fourth. The annual average would be $1,773.
  2. A scenario with more optimistic forecasts, with greater geopolitical risk, which places gold at $2,036 an ounce in the third quarter of 2022, and at 1,986 in the fourth. The annual average in this case would be $1,944 an ounce.

On the other hand, analysts at the US investment bank Goldman Sachs have also released their forecasts for the price of gold, pointing to 2,500 dollars an ounce by the end of 2002. They expect gold to appreciate this year, after closing 2021 with a drop of 4% compared to the end of 2020.

In their report, they state that as the end of the year approaches, the chances of the United States entering a recession will grow, which would imply a possible large increase in the price of gold.

In addition, they affect the rise in inflation as the main factor for the increase in the price of gold throughout this year. This rapid and sustained rise in inflation can lead gold to exceed the appreciation of other investment assets such as stocks or bonds, among others.