Inflation is one of the most popular words in the financial markets these days. Will it grow further? When will she fall again? What happens then with interest rates? Why isn't the price of gold going up?
First, inflation is a technical term. It is usually understood as a process of sustained price increases. In the Austrian school of economics, sometimes they already talk about inflation, when the money supply grows, or at least grows faster than the volume of economic production in a given currency area.
The causes of inflation can be very diverse. Overall, however, this is a monetary phenomenon. In other words, inflation reduces the purchasing power of fiat money. Countless books have already been published on this topic. Next, we will consider two main aspects:
1) When does inflation drive financial markets, including the price of gold?
2) How will the official inflation figures in the US and Europe develop further?
Time and again, including in recent months, financial experts have argued that gold does not provide a good hedge against inflation. Then the price dynamics is calculated and compared, for example, with the stock market. In short: stocks, that is, large Western indices, are rising and growing, while the price of gold is wobbling and is already at a distance of a few percent from its historic high.
But much more important than the current rate of inflation are inflation expectations. Because they determine the actions of consumers and players in the financial markets. If a person expects a sharp rise in inflation, then he tries to protect himself from its consequences. If central banks say that inflation is only temporary (as it is currently) and people trust monetary policy makers, then the desire to implement an appropriate capital protection strategy is diminished. Rather than gold, yield-oriented investors may choose to buy stocks or generally opt for a higher investment risk.
The price of gold rose especially strongly in 2020 (all-time high on Aug 5, 2020 at $ 2069 per ounce - US futures), because huge amounts of financial aid and money from central banks during the corona crisis have greatly increased inflationary expectations. What does this mean for the near future? The price of gold should rise again due to inflation, if the corresponding expectations of price increases are strengthened.
Many experts argue that the price of gold is heavily manipulated and therefore has stopped rising. This explanation is too simple. Yes, gold prices are manipulated in the same way as interest rates, stock prices, exchange rates, and bond prices. However, we saw a strong rally in gold until August 2020 - precisely for the reasons stated above.