When I started predicting inflation last year after the Covid crash, the general consensus was that the world was in for deflation as an economic crisis would cause a collapse in demand which would start a vicious cycle of falling prices. In that model cash is king.
I suggested that the world would print money as if it were confetti and that this would create inflation, likely quite a lot of it. I thought, and still think, that at best we will get at least 50% inflation in the next 3-5 years, and if things go poorly then it will be 100% and if the central banks and politicians make a mess of it (how could that possibly happen?) then there would be more, a lot more, with a possibility of a lot, lot, lot more than 100% inflation coming down the pipe.
I found a data point last week: beer has gone up 3,000% in the UK since I was born. I’m old but not so old that this number isn’t sobering.
So as we sit firmly in a monetary environment where creating huge amounts of money is the accepted norm, it is good to consider how inflation can be a very big blow indeed to our financial security.
Now it appears that the consensus is predicting a flush of inflation after the Covid crisis dies down. So the general opinion has gone from deflation, to no inflation, to a burst of inflation in about nine months of considering the impact of all the monetary dials going haywire, and that makes me think we are actually in for a fairly large amount of inflation already baked in, with room for the monetary authorities to blow the roof off if things do not go as well as hoped.
So this bodes well for any inflation hedge, and gold is of course the classic one.
So where are we with the gold price?
Gold had a great run and looked to me to be about to enter a huge vertical rally. It did not. Some might say bitcoin took over and enjoyed the vertical move of a haven asset in dangerous times instead of gold. There is some truth in that, as it is harder to pile into gold if you are in a panic than it is to load up on bitcoin—and we are, after all, talking about a fear trade. However, gold has a big headwind, too as a key use case; jewelry demand has been hit heavily by the Covid crisis and that has definitely held demand down and the price back. That drag is going to go away so that tether is cut and in many parts of the world it will be a natural move to buy gold trinkets if there is a belief that inflation is going to rise substantially, even in countries that are no strangers to their governments stealing their savings through currency dilution.
Here is a gold chart with the story so far, and I’m using the gold ETF SPDR Gold Trus (GLD), which is a tracker of the spot price for this example. I hold a lump of this fund and call option on it and I hold a lot of mining stocks too. Gold is already a serious part of my portfolio. Everything I look at gets weighed…
Read more:What’s Next For Gold?