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Unfavorable year for gold may intensify as stagflation risks rise


Oct 10, 2021
Unfavorable year for gold may intensify as stagflation risks rise

Central Bank said that the increase in consumer prices is temporary

Gold’s traditional role as a hedge against inflation has fluctuated throughout the year, but growing risks that the global economic recovery could stall due to rising price pressures could signal a change in the precious metal’s prices.

Inflation was already rising amid unprecedented pandemic-era stimulus as vaccine deployment spurred a gradual opening in some countries. Rising energy prices, in addition to broader increases in commodity prices, are now raising concerns about sustained price pressures. Nonetheless, bullion awaits its biggest annual decline since 2015.

Energy crisis leads to higher costs

Gold has historically been considered an attractive investment when inflation was rising, with the metal tripling in the late 1970s, but bullion is very sensitive to interest rates and investors are betting that central banks will soon begin to rein in stimulus and increase borrowing costs. That has weakened the ability to hold the precious metal.

“In the short term, gold is not a good hedge against inflation – contrary to popular belief – in the longer term it is better. Consequently, we don’t see it doing better unless growth disappoints and there’s a broader risk that will lead to a change in monetary policy trends,” said Wayne Gordon, executive director of commodities and foreign exchange at UBS Global Wealth Menagement.

However, this time investors are struggling with the possibility of stagflation returning to the markets due to the recent spike in energy prices. “Certainly gold has good upside potential if the narrative changes to sustained inflation and slowing growth. Stagflation would force a macroeconomic rotation from reflationary assets or commodities such as copper and oil to the precious metals sector,” said Nicky Shiels, group head of metals strategy at MKS.

Gold bullion has lost about 15% since its record high above $2,075 an ounce last year due to the resurgence of the dollar, and rising bond yields have reduced the attractiveness of the interest-free metal. Falling prices could be a buying opportunity for those who still believe in gold’s role as a hedge against inflation.

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