Inflation and the impact of inflation on the gold price

Inflation and the gold price influence each other, but certain trends and developments can sometimes be difficult to predict. In this article, you’ll learn more about the interaction between gold and inflation.

What is Inflation?

A brief explanation of inflation: inflation is the rise in the price level of goods and services. With inflation, you can buy fewer goods for the same amount of money, resulting in a decrease in purchasing power.

A little inflation is normal and even desirable for the economy to function well; the target rate is 2%. A small amount of inflation encourages people to spend their savings, which lose value over time. The same applies to companies, motivating them to invest.

More than 2% Inflation

If inflation rises above 2%, it can have negative effects on the economy. When prices rise too quickly, it can become harder for consumers to make ends meet on a fixed income. Consumer confidence in the economy may also decrease.

Companies suffer as well because consumer demand for their products or services may drop. Additionally, they may face rising costs for their own purchases.

Causes of Inflation

Inflation can have various causes. A key cause is confidence: if consumers are confident and spend their money quickly, demand for products and services rises, which can push prices up. Another important factor is cost-push inflation, where the cost of raw materials increases. For example, the higher gas prices in recent years.

Other causes include imported inflation; a practical example is higher prices for American products due to import tariffs for Europeans. This causes inflation on those products because you get less for the same amount of money. This is partly the result of political policies, which are also an important cause of inflation. Government policies related to, for example, central bank interest rates can affect the value of money.

Gold as a Safe Haven

Gold is popular during inflationary periods among investors as a safe haven. Gold is less affected by market forces and cannot simply be “printed.” As a result, gold is often more stable in value than currencies such as euros and dollars during uncertain political and economic times.

Rising inflation typically leads to a rising gold price because more people convert their wealth into gold or gold-related stocks due to increased uncertainty.

Possibility of Deflation

Besides inflation, deflation can occur, where prices actually fall. Deflation is unlikely under current economic conditions. Common causes are overproduction or a lack of consumer confidence, leading to waiting and saving money.

However, this is unlikely at present. Due to rising living standards and issues like climate change, scarcity is more likely than excess supply. This could vary locally or for specific products. For example, local overproduction of electric cars in China might lower prices in Europe, but this won’t significantly affect the overall economy.

Does inflation effect the gold price?

There are no signs that economic demand will drop rapidly. Geopolitical policies remain uncertain, and climate change may cause local scarcity or problems. Therefore, it is likely that inflation will remain at or above the target level in the coming years.

Consequently, it is also likely that the gold price will remain high, as uncertainties in the economy persist and gold is a relatively safe investment to protect against or avoid loss of purchasing power.

Disclaimer: The Silver Mountain does not provide investment advice and this article should not be considered as such. Past performance is no guarantee of future results.