In recent months, we can all see the effects of rising inflation – whether at the petrol station, in the supermarket or on our energy and bills for heating. What’s clear: the value of money is decreasing. Cash savings are not earning interest and penalty interest is being charged on higher deposits.
It is therefore worth leaning into the question of whether gold, as an asset that has stood the test of time for millennia, can protect investors from inflation. If you are also wondering whether gold coins are a viable investment in the current environment, even though their price remains relatively high, read on.
Why does inflation affect the price of gold?
Because inflation makes the money you will have in your account tomorrow worth less than the money you have in your account today, it becomes attractive to convert your money into other assets whose intrinsic value increases over the long term. Gold has this intrinsic value for several reasons. It is a rare metal, but it is abundant enough to be mined continuously. It also does not corrode easily. In addition, it is worth noting the emotional connection a person has with gold, its elegance and lustre.
Gold coins are also a safe investment choice because of the ubiquitous acceptance of this bullion, especially in times of political, social or economic turmoil and unrest – as we have today, anyway. It is this human bond (both individual and social) that makes gold valuable and explains why it is always in demand, even when supply is sometimes relatively stable. So, when inflation is on the rise and investors are looking for assets to protect their money, gold becomes an option, driving demand and thus its price.
Gold is considered a safe investment. History has shown that investors tend to turn to gold when there is fear in the market and expect stock prices to fall.
Why is it always a good idea to invest in gold?
Gold has always been a valued metal of mankind for its artistic and cultural value, moreover, it is associated with a rich history dating back to ancient Egypt. In many parts of the world, it serves as a symbol of wealth and the centrepiece of almost every special social gathering.
Each year, more than 1,400 metric tonnes of metal are used for jewellery, gold coins and other trinkets. However, the reason for buying gold goes beyond the usual celebration of an annual holiday or the need to display one’s wealth – people may also see the metal as a form of investment and to increase their wealth.
This is particularly evident in times of high inflation when the cost of living rises and the value of a currency falls. Given that the global economy is currently going through an extreme inflationary period, a new wave of gold purchases could be seen from the beginning of 2022. As you can see – there are solid reasons for this.
What to bear in mind when investing in gold coins?
Gold is not an income-generating asset. Unlike stocks and bonds, the return on gold is based solely on price appreciation. Moreover, investing in gold coins comes at a unique cost. Because it is a physical asset, it requires storage costs and insurance. Although gold is traditionally considered ‘safe’, it can also become volatile. Given these factors, gold works best as part of a diversified portfolio, particularly when it provides a hedge against a falling equity market.
When is the right time to invest in gold?
The answer is always – provided you are in it for the long term. Incidentally, gold has a positive overall impact on a portfolio. Even adding as little as five per cent to gold can improve the risk-adjusted performance of a typical equity/bond portfolio, taking into account an assumed probability of a crisis of 15 per cent. Given inflation and the existing geopolitical potential for conflict – gold coins are a sensible and prudent investment direction.