April 5, 2023


Relationship Between Inflation and Gold

Gold has been considered a valuable asset for centuries. It has been used as currency, a store of value, and a hedge against inflation. The relationship between gold and inflation is complex and dynamic. Inflation is a persistent increase in the general price level of goods and services in an economy over time. It is a major risk to investments, and buyers look for ways to protect their portfolios from the negative effects of inflation. Buying gold, in its numerous forms and options, allows buyers to buy an asset that typically does not depreciate during inflationary periods.

Inflation as a Risk to Portfolios

Inflation is a significant risk to investments because it erodes the value of money over time. When inflation is high, the purchasing power of money decreases, and the prices of goods and services increase. As a result, the returns on investments may not keep pace with inflation, leading to a decline in real value.

Gold buyers use various strategies to mitigate the risk of inflation, such as investing in gold or other assets that have a positive correlation with inflation or buying assets that provide a hedge against inflation. Gold is considered a safe-haven asset and a hedge against inflation because it is perceived to hold its value even during periods of high inflation.

Monetary Policy and Its Effects on Gold Prices

Monetary policy can indirectly impact the demand for gold, because it can also impact the strength of the currencies. When the value of a currency declines due to inflation or other factors, some may turn to gold as a hedge against currency devaluation. As a result, the demand for gold tends to increase during times of currency weakness.

Monetary policy set by central banks also influences the overall state of the economy by driving sentiment, which can impact the demand for gold in various sectors. For example, during times of economic uncertainty, market participants tend to flock towards safe-haven assets like gold, which can increase the demand for gold in the investment sector. Similarly, in times of economic growth and prosperity, the demand for gold in industries such as jewelry and technology may increase as consumers have more disposable income.

The Indirect Impact of Inflation on Commodities Like Gold

The impact of inflation on gold is indirect. Gold is a commodity, and its price is influenced by various factors such as supply and demand, rates, and geopolitical events. However, inflation indirectly affects the price of gold because it impacts the factors that influence the price of gold.

When inflation is high, central banks may raise rates to control inflation. High rates increase the cost of borrowing, which reduces consumer and business spending, leading to a decrease in demand for goods and services. This demand reduction can lead to a decline in the price of gold, as the demand for gold is also affected.

On the other hand, when inflation is high, market participants may seek safe-haven assets such as gold to protect their portfolios from the negative effects of inflation. This increased demand for gold can lead to an increase in its price.

Gold and Its Track Record as an Inflation Hedge

During the 1970s, the world experienced a period of high inflation due to various factors such as the oil shocks and the end of the Bretton Woods system. During this period, gold proved to be an effective hedge against inflation. The price of gold increased from $35 per ounce in 1970 to $850 per ounce in 1980. This increase in the price of gold was largely due to the high inflation during this period. Still, there have been inflationary periods during which gold underperformed almost all other assets. 

From 1980 to 1984, inflation averaged roughly 6.5% in the United States, but gold prices slumped nearly 10% annually, underperforming real estate, equities, and other assets that should have been more affected by those inflationary effects. 

Gold's Shortcomings as an Inflation Hedge

While gold has a track record of being an effective hedge against inflation, it is not without its shortcomings. One of the major shortcomings of gold as an inflation hedge is that its price is highly volatile. The price of gold can fluctuate widely due to various factors such as geopolitical events and changes in demand and supply.

Another example of gold's shortcomings as an inflation hedge is the period from 2011 to 2015. During this period, inflation in the US was relatively low, but the price of gold declined by over 40%. This decline was largely due to a decrease in demand for gold from emerging market economies, which were experiencing slower growth in the wake of the 2008 housing crisis and subsequent global recession.

Gold Buying for Maximum Exposure to Gold Market

Some market participants looking to gain exposure to the gold market can do so through various investment vehicles. One of the most popular ways to buy gold is through exchange-traded funds (ETFs). ETFs allow buyers and sellers to trade gold without having to physically own it. Another way to buy gold is through gold mining stocks. These stocks are highly correlated with the price of gold and can provide buyers with exposure to the gold market.

One popular way to gain exposure to gold is to buy physical gold in the form of coins, bars, or jewelry. When buying physical gold, it is important to consider factors such as purity, weight, and authenticity. Buyers should also be aware of the costs associated with buying, storing, and insuring physical gold. Traditional avenues for purchasing, storing, and selling gold are cumbersome and often expensive - that’s where Matador comes in. 

Matador modernizes gold trading by offering a mobile app that allows users to buy, store, sell, and redeem gold. It has special features such as buy now pay later options, low fees, and an innovative loyalty plan where users can earn actual gold. The gold is stored with certified custodians, such as the Royal Canadian Mint in Ottawa.

Buying physical gold can provide market participants with a tangible asset that they can hold and store themselves. This can provide a sense of security and control over the investment. Additionally, physical gold can serve as a hedge against inflation, economic uncertainty, and currency devaluation.

Buy Gold Online With Matador

Buyers who prefer to hold physical gold as a hedge against inflation can use Matador to buy gold without having to worry about storage and security. Matador's platform is easy to use, and market participants can buy gold with just a few clicks of a button.

Matador is a modern trading platform that simplifies the process of buying and selling gold. Using our mobile application, anyone can easily purchase, store, sell and redeem gold. Our platform stands out with features like convenient buy now pay later plans, transparent pricing with low fees, and a unique loyalty plan that allows users to earn real gold.

To ensure the safety and security of your assets, we store your gold with certified custodians. Our storage network begins with the Royal Canadian Mint located in Ottawa, Ontario, and is facilitated by a secure blockchain network. 

Get started and sign up for Matador today to buy gold online, and start buying gold. 

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