Fears of unbridled inflation continue in the United States as the Labor Department reports that the consumer price index in June this year was 5.4 percent higher than that of June 2020. The jump marks the largest increase since August 2008, almost 13 years ago. Although President Biden has assured the public that current inflation rates are temporary, Federal Reserve (Fed) chairman Jerome Powell admitted that inflation is likely to remain elevated in the coming months, with some increases being more persistent than expected. Numerous polls have shown that economic issues such as the rising cost of living are a major concern of the American public, particularly in uncertain and trying times such as these where people are already struggling to pay their bills.
Money for Nothing
Inflation is simply defined by economists as ‘too many dollars chasing too few goods.’ So, what has been causing inflation in the US? One of the biggest factors is the monetary policy of the Fed. The Fed has been dedicated to reviving the economy with substantial monetary stimulus, buying billions of dollars worth of bonds and mortgage-backed securities. There has also been a significant amount of fiscal stimulus being injected into the economy—including relief checks, tax credit, unemployment benefits, and the Paycheck Protection Program—with the Biden administration sending out $1.9 trillion in pandemic assistance to Americans in March alone.
In order to finance their robust spending and keep the economy looking alive, the Fed has been working hard to produce massive amounts of money. The total assets of the Fed amounted to about $4.1 trillion in January 2020 and had doubled to a mammoth $8.2 trillion by July 2021. Fed funds are, however, not always in the form of cold hard cash. The government goes through a convoluted economic process whereby it creates electronic credit by borrowing against its Treasury debt. It then uses this credit to fund large purchases and boost the reserves of banks and the financial system. This is all fair and well and has been a proven way to rescue a flailing economy.
Unfortunately, the desired effect has been somewhat dampened due to the scarcity of goods and services, which has resulted in the inability to efficiently consume the trillions of dollars that are in circulation. Stalled production, supply chain disruptions, and wage pressure leading to employment shortages are some of the reasons that have led to a low supply of goods and services in the country. This discrepancy between demand and supply was apparent when the economy started to reopen following widespread vaccinations. Certain goods such as second-hand vehicles skyrocketed in price due to consumer demand greatly outstripping supply, thus contributing to the extraordinary inflation.
Good as Gold
As price inflation increases and the value of fiat money decreases, investors are looking for good investment hedges to mitigate inflation risk. From being illegal for Americans to own in the 1930s to becoming one of the most consistently reliable precious metal commodities, gold has risen in value exponentially over the years. In 1970, gold was worth approximately $36 an ounce. Today, an ounce of gold will cost you about $1,800. In addition, global economic superpower China has been stockpiling huge amounts of gold, buying gold mines, and promoting gold ownership to its citizens, causing more appreciation of its value and a potential for long-term gains.
Because the value of commodities generally has a reciprocal relationship with inflation, the value of gold typically increases as the value of fiat money decreases. Although this correlation does not hold true a hundred percent of the time, assets like gold remain an attractive investment in times of economic volatility. When the public is concerned about the future—be it the decline in property prices, the threat of terrorism, or a fear of inflation—investors seek the security of stable commodities. Hence, the recent inflation rates have investors scrambling to put their money behind what they consider the best gold ETF on the market.
Investor confidence in gold is itself a reason for its enduring success. When people flock to put their money into gold, it pushes up the precious metal’s market price, and in turn, helps to retain its value even during times of economic recession. And—unlike paper assets like stocks, bonds, or cash—which have a debatable intrinsic value, the value of gold will always be rock solid. The price of gold has been on the rise since April and experts have predicted that it would continue to improve due to a weak US dollar, pressure from inflation, and the fallout of a new wave of Delta infections across the globe.
Despite the best-laid plans of the Fed and the CDC, it appears that inflation pressures and the effects of the pandemic will take longer than we expected to abate. For short-term investors, gold stands out as an excellent crisis hedge that can help players ride out the recession and even come out on top. For those taking a long view, gold remains a traditional safe-haven asset that could continue to rise in value for the next ten years.