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What is inflation and how does it affect precious metal prices?

Wednesday, July 21, 2021



To put it simply, inflation is the decline of purchasing power of a given currency over time, due to price rises in essential goods and services that we al need on a regular basis.

Depending on the speed of the price rises, inflation can have positive and negative effects. If the price rises are slow and controlled, it is a good indicator that the economy is in a good position. This is because increased prices are reflected in increased wages, spending power and standards of living.

The negative effect can take place when the price rises are rapid and uncontrolled. This can be particularly dangerous as it increases the financial burden on households and individuals. It can also spiral and have more sinister consequences impacting whole countries, this is known as hyper-inflation, which the Germans experienced after World War I and has been more recently seen in Zimbabwe and Venezuela.

The usual cause of inflation is an increase in raw material prices or wages or a surge in demand  for products and services.

The restrictions that were put in place during the pandemic have put a stop to a lot of the production of many raw materials on a global scale. The extent of these shortages, that have occurred due to the pandemic, are now being highlighted as the world begins to reopen, thus pushing prices up.

To exasperate the situation more, the pandemic meant that most of the population has spent less due to the lockdowns and restrictions. Now we are seeing that there is massive demand in many sectors. Flashback to the queues that built up when non-essential retails stores re-opened in the UK.

Inflation does appear to be stirring, with many examples of recent price increases supporting this predicament. Some economists predict that inflation will move above the Bank of England target of 2% by the end of 2021. The true picture will emerge over time when the economy fully re-opens.

Bullion, gold in particular, is often invested in as a way to protect investors and individuals alike against inflation. Bullion prices fluctuate daily in line with buying and selling on global markets. Up until the end of May US inflation rose by 5%.

Continued inflation particularly in the US means that the gold price will increase year on year as the global price of gold is measured in US Dollars.

If you think inflation is on the rise Buy Now to benefit from the future price rises.

Copyright: olivier26 / 123RF Stock Photo