Without question, we’re now seeing a resurgence of above average inflation and commentators believe it will only get worse. Some have been saying for a while that investors should find assets that will protect their portfolio from the ravages of inflation and is one of the best options. Some may disagree that gold is an effective hedge against inflation. For example, if we analyse the period from 1980 to 2000, one could jump to the conclusion that there isn’t a strong correlation between the CPI and gold, and therefore, gold must be a poor inflation hedge, given that the metal declined over 43% during those 20 years while the Consumer Price Index increased by 119.4%. However, data and basic economic principles refute this conclusion. It’s important to understand that inflation is almost always on the rise over a 12-month period, but not all inflation is the same. The environment today isn’t anything like the 1980-2000 period. This could be a 1970-redux, or even worse. Which means gold should perform extraordinarily well and will be a good hedge against the depreciating currencies. Monetary inflation is the expansion of the money supply and in a non-gold-backed currency and normal economic environment, money supply is constantly increasing. Price inflation (or what the CPI measures) is the end result of monetary inflation. We’re referring to overall long-term trends in price inflation, not transitory spikes or lulls in prices in certain industries or assets due to supply/demand imbalances caused by short-term phenomena. The CPI always lags money supply growth as it takes time for monetary inflation to permeate the economy. For example, from 1970 to 1980, every surge in the money stock was followed 2-3 years later by a surge in consumer prices — like clockwork. What determines gold’s value is monetary inflation. Money supply continually increases over time, and gold follows money supply higher over the decades, with the metal going through its own bull/bear cycles along the way. Sometimes it trades well above fair value, sometimes below. However, real interest rates also impact gold, but it’s more over the short to medium term. Gold didn’t work well in the 1980s and 1990s because the inflation rate was on the decline (i.e., there was disinflation) and eventually moved to historic lows, yet interest rates remained fairly elevated. This positive real interest rate environment made gold less attractive as an investment. Other factors such as typical action during boom/bust cycles, a significant increase in annual mine supply, stagnant money supply, and producer hedging, all acted as additional headwinds. In today’s environment, the exact opposite is occurring. Inflation is aggressively building and the Fed remains behind the curve — maintaining ZIRP (Zero Interest Rate Policy) and potentially implementing yield curve control (i.e., imposing interest rate caps on long-term Treasuries) — which has created another period of deeply negative real interest rates. Gold is responding because of its ability to protect purchasing power in this environment.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of May 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.