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Gold could be Antidote to 2021 Inflation Spike

Thursday, December 17, 2020

If 2020 was the year of surprises to the downside for many, 2021 is surely going to be one that surprises to the upside in a number of ways. The current recession due to the ongoing COVID-19 pandemic is sure to push unemployment up, while stimulus measures and a poorly-resolved Brexit could push inflation higher than expected.

Gold, which typically rallies during periods of economic weakness, could, as a result of these crises, mount a strong price rally, should the pound remain subdued and inflation becomes rampant. Learn how it could be just the antidote, if runaway inflation gives us the blues in 2021.

An unprecedented crisis

COVID-19 wreaked lasting damage like no other recession in recorded history. Almost twenty years of economic growth were wiped out in just six months, as lockdown restrictions curtailed economic activity. The UK entered its third recession in thirty years, and tens of thousands of Britons lost their lives to a virus that was virtually unknown until a few short months ago.

Going into Christmas 2020, we face the tail-end of a second surge in COVID-19 cases, with restrictions of one shape or another expected to remain in place, until a vaccine starts to bring the pandemic under control. The economy is expected to have shrunk in the final quarter of the year, as large parts of the UK returned to a month-long lockdown, and the economic pain begins to bite.

While the jobs market is experiencing losses, and the stock market is reeling from its worst crash since records began, gold has been making records across the board. Often rising in value during times of strife, gold prices have soared to over £1,500 per troy ounce during the year, before dipping slightly in more recent weeks.

If you bought gold priced in pound sterling back in 2015, you will have seen the value of your investment double in just five years, reflecting how turbulent a period it has been for the country. As you’re about to learn, policies being put in place at present could be supportive of a continued rally over the coming year.

BoE continues to adopt QE

The Bank of England (BoE) has the responsibility for ensuring price stability, using a special inflation rate target of two per cent on an annualised basis. When the economy lurched into recession, the BoE slashed interest rates to 0.1 per cent, the lowest point in British economic history, and began creating billions of pounds electronically, to buy up government bonds. This policy, known as quantitative easing (QE), is intended to push down the yields on government bonds.

Lower yields as a result of QE are supposed to prompt more people to borrow and spend, in the prospect of low rates of interest for the foreseeable future. The Bank of Japan adopted a QE programme from 2001 onwards, while trying to revive an ailing Japanese economy, which was sluggish after the bursting of an asset price bubble.

QE was supposed to revive inflationary expectations and prompt higher growth, but the jury is still out on whether Japan’s 20-year monetary experiment has revived its economy from a lengthy period of deflation. One thing is for sure - the more money you create, the lower the unit value of each pound or yen you have left. A weaker pound means higher prices for imports from abroad, raising prices across the board - resulting in higher levels of inflation.

Gold has been a fantastic hedge against inflation, as we saw in the 1970s, and again in the 2010s. When the price level of an economy shifts higher than expected, investors start looking to assets which can preserve the value of their money. Higher inflation means the pound in your pocket is eroded over time, if it isn’t spent in the here and now.

Having interest rates held at close to zero during a wave of high inflation means savers are effectively suffering from a negative interest rate, and losing money quicker than they can spend it, when adjusted for inflation. By putting money into gold, which surges during spells of high inflation, wealth can be preserved, or even augmented, if the price of gold rises fast enough.

Gold as a hedge in 2021

British investors reap an investment dividend when it comes to gold, because, irrespective of its value in US dollars, the fate of the British pound is the core driver of UK prices. If, for example, the price of gold remained stable in US dollar terms, a sterling devaluation of 30 per cent would result in UK gold prices suddenly jumping 30 per cent to compensate.

There are plenty of reasons to be wary of the pound in 2021. If Brexit negotiations are handled poorly, and result in a disruptive outcome, investors may prompt the pound to fall, boosting the price of gold by default. Additional upward momentum from gold priced in US dollars would simply add to the gains made by investing in gold.

Add to that the downward pressure policymakers are actively placing on the pound through QE and low interest rates causing a spike in inflation, and you have the cocktail for a stagflationary economic climate in 2021. Stagflation is when prices rise amid stagnant or non-existent economic growth. This could follow straight out of the playbook of the 1970s - rampant inflation, an economy too weak to sustain rising interest rates and gold prices soaring to new all-time highs.

That means it could be time to consider buying gold from the Gold Bullion Company. We have a track record of providing high-quality bullion products and VAT-free silver from reputable manufacturers for many years.

If you’re curious about buying gold, or wish to make a sale today, give us a call on 01902 623 259. We all wish you a merry Christmas and a happy 2021!