Gold and Inflation

gold and inflation

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Gold and Inflation

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The price of gold and inflation share a direct relationship; as inflation rises, so does the price of gold. Simply explained, inflation occurs when the price of goods and services rises over time. As things become more expensive, income becomes less flexible.

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While it is commonly assumed that gold and inflation are positively associated, the inverse relationship between interest rates, the dollar, and gold should be considered. Given that gold is priced and sold in US dollars, you may be wondering how monetary movement impacts the other. The most prevalent interpretation of this relationship is that the stronger the US dollar becomes, the lower the price of gold becomes. Similarly, the higher the price of gold, the weaker the US dollar.

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Interest rates

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When a central bank considers whether or not to adjust its monetary policy, inflation is a critical consideration. Price stability would appear to be the principal purpose of most central banks. That is not always the case, however.  Frequently, the Central Bank is tasked with achieving multiple objectives, such as financing wars and growing the stock market (both inflationary), while maintaining moderate inflation.

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When the Federal Reserve expands the money supply in order to boost employment, inflation rises and interest rates rise. One reason interest rates are rising is that banks are concerned that their loans will be repaid with “cheaper” (i.e. less valuable) dollars, so they demand higher interest to offset the risk.

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Another reason interest rates are rising is that the Federal Reserve is pushing them up. They accomplish this by increasing the interest rate they charge banks. So, on the one hand, the FED expands the money supply, causing inflation to rise (beyond the FED’s aim of 2%), but on the other hand, the FED raises interest rates.

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An alternate currency

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Gold was the initial currency therefore, it might be considered an alternate currency.  When residents lose faith in their own money, they will shift to an alternative currency.  Gold is more likely to maintain its value. When inflation becomes severe enough (hyperinflation), the entire economy may convert to using an alternate currency. Gold.

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As with any other asset, you’re expecting to grow your wealth and/or preserve it when you invest in gold.  

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Keep paying off debt, investing, and saving. No matter what the Federal Reserve does, how the markets react, or whatever the latest news of the world is we see, it’s nice to have a solid financial base in gold!   If you stack with the goal of ounces instead of dollar value, you see immediate gratification and little worry about spot prices.

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Bottom line

The time to invest in Gold is NOW and secure a financial future. 


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