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Look To Gold As Inflation Risk Looms, Says World Gold Council
Following the Bank of England’s decision to cut interest rates to 0.5 per cent, and amid similarly rock-bottom levels globally, investors should look to gold as a hedge against future inflation, argues the World Gold Council.
While the prospect of deflation may be a concern, the Council argues that the Bank’s move to slash interest rates and pump some £75 billion (around $107 billion) into the UK banking system has heightened the risk of inflation.
Understandably, the Council advocates investing in gold to offset the erosion of wealth that inflation causes, maintaining that while prices may fluctuate in the short term, the precious metal’s purchasing power has remained stable over centuries.
“With interest rates now at the lowest level in 300 years, investors are searching to find instruments with which they can protect their portfolio from inflation’s pernicious effects. Gold tends to rise in value when paper money loses its worth, so for retail and institutional investors alike, gold’s ability to preserve wealth will become even more attractive,” said Marcus Grubb, head of investment, World Gold Council.
Some institutions such as Morgan Stanley have been bullish about gold, but HSBC Private Bank recently cautioned that although the metal can retain its strength in the near term, prospects for gold prices are less certain further ahead.
“While one of the reasons for the peak in gold prices has been a flight to safety, we must point out that gold may not in reality be a 'safe' investment,” Fredrik Nerbrand, head of global strategy at the bank, said in a note.
Mr Nerbrand highlighted the fact that gold is just as volatile as equities - with a 30-day volatility of 20.6 per cent for gold versus 30 per cent for equities - and is highly dependent on jewellery demand.
“Historical performance also suggests that while gold tends to be the preferred commodity in times of crisis and increased risk-aversion, it has never fully decoupled from commodity cycles in the long run, and we do not expect this time to be different,” Mr Nerbrand said.
