Tuesday, 28 June 2022 11:10

Record Inflation: Does Gold Protect?

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The current rise in inflation is causing old fears to resurface and traditional money strategies to regain importance.

Investments in gold have been a popular store of value for several centuries and are intended to protect one's assets as comprehensively as possible and to a large extent. In this context, the question often arises as to when this form of investment really makes sense.

Addition to the total assets

The price of gold has been benefiting from increased demand for a few years now. Despite the one or other fluctuation, the precious metal seems to be able to maintain its value and, according to renowned experts, to be a suitable addition to one's overall assets. A share of between five and ten percent is considered an acceptable size for investors. In this context, there are always constructive discussions about the actual added value of the precious metal as a suitable protection against inflation.

Financial experts all over the world seem to be able to agree on this issue. In particular other material assets as well as securities are according to opinion of some experts by no means to be underestimated and with the correct strategy likewise a promising possibility of the financial investment.

Investments in times of new inflation records

The development of each asset class depends on a multiplicity of different factors of influence. With gold it behaves in relation to the price development likewise. If potentially interested investors were to look solely at the development of inflation rates, the popular precious metal would certainly be an extremely good choice for their own asset portfolio.

In addition, the demand situation of private investors as well as the central banks is an important factor for the performance. In principle, there is nothing against investors buying a comparatively small amount of the precious metal and feeling somewhat more secure with it.

A matter of personal investment strategy

From a historical perspective, the precious metal has always performed well in times of increased inflation and provided security for investors. Compared to equities, however, there is no denying that there is a significant yield gap. For example, it can be seen that securities have performed much better during one inflationary phase or another and have generated higher returns for investors.

The dependence on the real interest rate

Nearly all precious metals have experienced a real price spike in 2020. In addition, during the last two years, the inflation rate has increased significantly, which is why many investors expected prices to perform even better. However, past data shows that gold has very rarely reacted to inflationary pressures within a short period of time. Far more important for the development of the precious metal is a long-term period taking into account the real interest rate. It is currently difficult to predict how the price of the precious metal will continue to develop in light of current economic and (financial) political scenarios.

Preventing possible risks

Gold is sometimes seen as a kind of insurance or protection against risks on the international financial market. For this reason, numerous financial experts agree that the precious metal should be a fixed component of every broadly diversified asset anyway. The very fact that it has served as a good store of value for many centuries and can sustainably support purchasing power speaks for both stability and permanence.

In principle, gold is a good counterbalance against inflationary developments. Enormous returns, on the other hand, are more in the realm of wishful thinking. Anyone who adds a certain gold share of around 10 percent to their personal asset portfolio is therefore certainly not doing anything wrong.