So far this year, gold's role as a traditional hedge against inflation has not been "effective". However, as global price pressures continue to rise recently and there is a growing risk that the economic recovery will stall, some bulls in the gold market, which has been silent for a long time, are now ready to bet that gold and silver prices may usher in a "big turnaround".
Against the backdrop of unprecedented stimulus measures during the epidemic and vaccination that has led to the gradual reopening of many countries, inflation has risen sharply in many parts of the world, especially the surge in energy prices over the past month, which has raised concerns about rising price cost pressures.
At the same time, the current performance of precious metals assets in the commodities sector is significantly weak. Both gold and silver have fallen more than 8 per cent over the past year, outperforming only platinum group palladium. With continued weakness in the first nine months of the year, gold is likely to record its biggest annual decline since 2015.
Historically, gold has been seen as a relatively attractive investment when inflation rises. When US consumer prices peaked at nearly 15 per cent in the late 1970s, gold tripled.
Now, investors are grappling with a similar risk of stagflation-slowing growth and rising prices at the same time. Stagflation in the 1970s hit major western economies, and now stagflation has inadvertently become a hot topic in the market as energy costs soar, and supply chain chaos has pushed up the prices of raw materials for many commodities.
"if inflation continues to rise and economic growth slows, there will certainly be good room for gold to rise," said Nicky Shiels, head of metals strategy at SA in MKS (Switzerland). Stagflation will force people to rotate macroscopically from typical re-inflationary assets or commodities such as oil and copper and into the precious metals sector. "
The PCE price index, the Fed's favourite indicator of inflation, showed inflation of 4.3 per cent in the 12 months to August, the biggest increase since 1991 and well above the Fed's target of 2 per cent. In addition, US CPI data have remained at the high level of the "fifth era" for many months after soaring to the highest level since 2008 in June.
Investors will also be keeping a close eye on the September jobs data released on Friday. A long period of high unemployment is another sign of stagflation and is likely to delay raising interest rates because the Fed has adopted the maximum employment target as one of the criteria for measuring when to raise interest rates.
Gold has fallen about 15 per cent since hitting a record above $2075 an ounce last year, in part because a stronger dollar and rising bond yields have undermined the attractiveness of the interest-free metal. Silver prices have also tumbled over the same period and are now close to their lowest level since July 2020. However, for those who still believe that gold is a hedge against inflation, a fall in the price of gold could be a buying opportunity.
"it is no longer a question whether inflation will have a serious impact," said Gnanasekar Thiagarajan, director of Commtrendz Risk Management Services. "the only question is when it will have a serious impact. Therefore, investing in gold and silver is the best choice at the moment, because gold is a hedge against inflation, and when gold prices start to rise, silver tends to appreciate more. "
However, there are also some gold bears who disagree with these bullish views on the price of gold because of the threat of inflation. Gold is also sensitive to interest rates, they say, undermining the case for gold as investors bet that central banks will soon start cutting stimulus measures and pushing up borrowing costs.
Wayne Gordon, executive director of global wealth management commodities and currencies at UBS, said, "contrary to popular belief, gold is not really a good hedge against inflation in the short term, although it will perform better in the long run. So unless economic growth is disappointing and there is broader risk aversion that leads to a reversal of tighter monetary policy, we don't think gold will perform very well. "
