Inflation and Ukraine crisis support GOLD

Kanish Chugh

ETF Securities

After a strong rally in 2019 and 2020, gold traded sideways last year. Stock markets surged higher, and investors priced in higher US interest rates, blunting gold’s allure. When US interest rates rise, the value of the US dollar also rises, meaning it requires fewer US dollars to buy gold.

Cryptocurrencies like bitcoin also surged. Crypto poses a challenge to gold, as it gives investors alternative ways to hedge against fiat currencies.

As we head into a new year, signs are suggesting things could be looking up for gold.

Gold and geopolitics: the safe haven

Disruptive geopolitical events usually damage shares and bonds. This is because when turmoil strikes, investors flee risk. The value of bonds and shares are determined by what they’ll do in the future, or by their future cash flows. When investors worry about the future, they naturally ditch assets whose value derives from it. 

 

Source: Bloomberg, ETF Securities, 14 February 2022

Gold is different and unusual in that it can thrive during political unrest. Examples of this are 9/11, Brexit and COVID-19—during which gold outperformed shares and treasuries.

There are good reasons that gold does this. Gold has a proven history as a safe-haven asset. More fundamentally, gold has no cash flows, unlike shares, bonds, property. This means it cannot be valued based on future cash flows.

Right now, there are many potential triggers. These include Russia and Ukraine, Taiwan and the South China Sea, and Iran. If these or any other shocks do come about, gold could decouple from a falling share market, as it has done in the past.

Inflation hedge and currency debasement

Gold is also a known inflation hedge. And inflation is the first word on investors’ tongues today, as it storms higher in the US and around the world.

When higher inflation numbers were printed last year, many investors shrugged it off. They believed “inflation is transitory” and would fade as covid stimulus packages subsided.

But in 2022, inflation has continued rising. The USA’s consumer price index, the main gauge of inflation, hit 7% in December. It looks increasingly like inflation will be stickier and more enduring than many optimists hoped.

Higher inflation has historically supported gold. According to the World Gold Council, gold performs best when inflation is above 3%. When inflation rises, the value of paper money declines. This means you can buy less gold (i.e. that prices are higher).

The past six months – as inflation has risen – gold has outperformed major benchmarks. It has beaten the S&P 500, Nasdaq 100, US aggregate bonds, bitcoin and even TIPS.      

Source: Bloomberg, ETF Securities. Data from 11 Aug 2021 – 11 February 2022

Why not gold miners or cryptocurrency?

Investors curious about gold also sometimes ask about bitcoin and gold miners. Questions about bitcoin became particularly prevalent last year, as headlines claimed it was replacing gold.

From where we sit, bitcoin has merits as an investment. However, it is unlikely to function as a substitute for gold. Bitcoin is much riskier than gold and rarely regarded as a safe-haven. Relatedly, it tends to underperform in periods of heightened volatility, such as during March 2020’s covid selloff where it lost half its value. 
 

Source: Bloomberg. Data from 22 May 2006 – 11 February 2022.

Gold miners for their part are exposed to the gold price. However they have enjoyed no breakout in 16-years, and have strongly underperformed both physical gold and the stock market.

Conclusion

Gold is known for being unpredictable. For some investors, this is a strength, as it helps ensure gold is an effective diversifier. And as we enter the new year, wearier, and with more dangers lurking, gold could continue providing an important source of diversification in investors’ portfolios. 

ETF
ETFS Physical Gold (GOLD)
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ETFS Metal Securities Australia Limited (ACN: 101 465 383) is the issuer of the ETFS Physical Gold (GOLD) product. This product is issued under a prospectus. ETFS Metal Securities Australia Limited (MSAL) is a Corporate Authorised Representative (CAR No: 001274650) under the ETFS Management (Aus) Limited AFSL. (AFSL No: 466778). ETFS Metal Securities Australia Limited is a member of the ETFS Capital Group and is the issuer of the Prospectus for the Metal Securities. Before considering an investment in these products, investors should obtain a copy of the Prospectus from ETFS Management (AUS) Limited. Investments in any product issued by the ETFS Capital Group are subject to investment risk, including possible delays in repayment and loss of income and principal invested. Neither ETFS, ETFS Capital Limited, ETFS Metal Securities Australia Ltd nor any other member of the ETFS Capital Group nor any of their respective directors, employees or agents guarantees the performance of any products issued by the ETFS Capital Group or the repayment of capital or any particular rate of return there from. The value or return of an investment will fluctuate and an investor may lose some or all of their investment. Past performance is not a reliable indicator of future performance. Livewire gives readers access to information and educational content provided by financial services professionals and companies (”Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

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Kanish Chugh
ETF Specialist & Head of Distribution
ETF Securities

Kanish Chugh is responsible for distribution covering sales and marketing strategy for institutional, intermediary and retail clients. He joined ETF Securities in 2015 and has previous experience with Fidelity International, BlackRock and...

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