Published: 2022.11.23. The return of gold as a hedge against inflation

The return of gold as a hedge against inflation - Preview

Last Thursday, it was announced that the US inflation rate for October this year was 7.7% per annum, which was well below expectations, causing strong buying interest not only in the stock markets, but also in the gold market. This led, for example, to the fact that for the first time in four weeks, the amount of gold held in the world's largest gold ETF fund SPDR Gold Shares increased from 908.38 to 911.57 tons.
It also means that, at least in the US, the depreciation of money seems to be slowing noticeably, with June's highest inflation rate in over 40 years at 9.1% per annum.
Gold is generally considered to be an asset class that benefits from rising inflation. However, as we are still living in not normal times, despite the easing of inflationary pressures, the yellow precious metal is trending towards a significant increase.
The reason: along with the data on inflation, concerns about interest rates have also eased, which is especially clearly seen in the example of the FedWatch tool of the operator of futures exchanges CME Group. There is currently only a 19.4% chance of seeing another 75 basis point rate hike in mid-December, up from almost 70% a month ago.
This means that key U.S. interest rates, and hence opportunity costs (the interest forgone by gold holders), may rise less dynamically in the future. However, investors should always keep the following points in mind.
First, rising interest rates are always accompanied by lower bond prices, which has resulted in large asset losses for fixed income bondholders this year.
Second, demonetization is still quite large in excess of the yields achievable on US government bonds, leading to high negative real interest rates. This phenomenon is much more pronounced in Germany due to lower yields and higher inflation, which currently stands at 10.4% per annum.