An increase in inflation reduces the value of a currency. Inflation means that you going to pay more for the goods than usual. This results in a reduction in consumer purchasing power. Because of this, people tend to hold money in the form of gold. When inflation remains high over a long time, gold is used to hedge against the economic condition. This, in turn, pushes the prices of gold higher than usual. This is why it is often said that gold and inflation are positively correlated. This article highlights the reasons why the impact of inflation on gold prices is unpredictable.
Gold can be an alternative currency in so many ways. After all, gold was once a currency. With coronavirus pandemic, gold prices are likely to rise. Even though gold is used to hedge against economic conditions like inflation, it is can also be an important tool to hedge against the unexpected like coronavirus pandemic. Gold tends to perform best whenever anything unexpected happens
How is coronavirus affecting the gold price?
We are already seeing the impact of coronavirus on the supply of gold. Some of the biggest gold refineries are closed down by the local authorities. This is quite unpredictable because we don’t know how long this is going to be. If this continues, the impact on the supply side will attract higher prices in gold, especially if the demand for the precious metal remains constant.
Because coronavirus cases increase daily, demand for gold jewelry is likely to go down. But investments in gold can still increase even in the middle of coronavirus.
Why inflation impact on gold is unpredictable
For most people, inflation is simply an increase in the prices of commodities. Well, it isn’t that simple. Those higher prices are the effects of inflation which are usually volatile and unpredictable. There is a relationship between gold and inflation.
Devaluation of US Dollar
Inflation contributes to the devaluation of the currency in circulation. Currently, the US dollar value has reduced. Current prices of gold cannot accurately reflect on how much the US dollar value has depreciated. With the continuing impact of COVID-19 on most industries, the supply of the US dollar could shrink by half or even more.
What most people predicting right now are much higher prices. The higher prices occur because of the weaker US dollar. Because the US dollar is losing value and purchasing power, people are likely to pay more and more for ordinary goods. When US Dollar depreciates relative to other currencies in the world, the prices of gold increases. Conditions like this are what contribute to higher prices of gold.
Higher prices of gold, the effects of inflation, makes it difficult to simply rely on economic statistics for information. We are in uncertain times where people must be alert at all times because of the uncertainty of the condition of the economy.
Conclusion
Inflation is not simply higher prices but the effects that come with the higher prices. These effects are unpredictable especially due to coronavirus. One cannot second guess what is likely to happen. Dollar value directly affects the prices of gold.
More:
- Gold Prices – Expected Inflation Has Already Occurred; Effects Are Unpredictable
- Investors should have up to 10% in this ‘hedge against the unexpected,’ says ‘Godfather’ of gold
