The Impact of Inflation on Gold
Gold prices vary due to a combination of several factors. These include the supply of gold, the demand for gold and the investors’ behavior. Let’s have a look at all the factors and how inflation impacts the prices of gold.
Inflation Hedge
Investors consider gold to be an inflation hedge. An inflation hedge is basically an investment that’s said to protect the reduced purchasing power of a certain currency.
It results from the devaluation of the currency because of an increase in prices, usually due to inflation.
This investment is supposed to be an asset that can store the value of your money or increase it over a certain time period.
Impact Of Inflation
Studies have shown that the prices of gold don’t correlate to inflation. If inflation increases in a country, it won’t have a significant impact on gold. Then why do the prices of gold increase?
As a result of an increase in prices, there is economic uncertainty and people feel that the safest investment would be gold.
As more people buy gold to invest in it by purchasing gold bullions and gold coins, the demand for gold increases.
We know that there’s a limited supply of gold and the excess demand brings the price surge.
Since gold is a worldwide commodity, there are many other factors that play an important role.
Supply Of Gold
There is limited supply and as gold is not a perishable good, more supply should reduce the prices. However, prices have been increasing overtime even though mining companies have been increasing their supply.
The increase in price results from the exponentially increased demand for gold in terms of jewelry and investment.
Some cultures treat gold as a store of value like in China and India people buy it in an abundant quantity. These people store it and have no plans on selling it.
The Role Of Central Banks
For central banks, gold is a dead asset as it doesn’t generate any returns for them.
When the central bank has a large amount of foreign exchange reserves, they would want to reduce the amount of gold that they’re holding.
However, the central bank is always disadvantaged as they’re unable to reap any benefits from selling the gold. This is because when they start trading gold the price of gold falls.
Investors always want to balance their portfolios in order to reduce the risk and get more benefits.
This results in more investment in gold if the country is facing any financial crisis or geopolitical problems.
Contact us to get our assistance in investing in gold and silver to attain a balanced investment portfolio with the help of our expert financial advisors.
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