25 July 2023
The global rise in inflation and its financial ramifications is inadvertently making a case for the value of gold. Gold, which is typically under-owned by most investors, is anticipated to provide real returns of 2 to 3 percent per annum over the long term, after adjusting for inflation, according to John Reade, Chief Market Strategist for the World Gold Council (WGC).
Given gold’s robust performance in 2020 when it returned over 25 percent, Reade advises investors to temper their future expectations. However, he adds that the coming three years may yield returns slightly higher than long-term projections. The primary driver for this is the expectation that the U.S. could enter a rate-cutting environment in response to inflation, resulting in a weaker U.S. dollar.
The potential for a weaker dollar and lower interest rates typically bodes well for gold, a well-known hedge against inflation and currency fluctuations. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, while a weaker dollar tends to make commodities priced in the currency, like gold, less expensive for holders of other currencies.
In the current environment of rising inflation and increased financial stress globally, gold’s traditional role as a store of value is becoming even more pertinent. Not only can it provide a hedge against inflation, but it can also offer a cushion against market volatility and currency risks, which are expected to increase amidst inflation-related pressures on global economies, including the U.S.