Gold has certainly not experienced its best year in 2021. In the mainstream media one could already read that gold is no longer an inflation hedge, is a relic from earlier times, and that Lego is supposed to be a better investment than gold.
In fact, global inflation has risen sharply in 2021 as, for example, in the United States has risen up to 7%, according to official CPI figures. Gold on the other hand has experienced a negative price development in 2021. The gold price has suffered a loss of around 4%.
However, despite gold being beaten down in the mainstream media, it is amazing that the gold price has still remained at a relatively high level and that the negative sentiment has not led to sell-offs.
Which is why one might wonder if the negative news was simply pushed by the mainstream media to avoid spreading panic among the population. Many people know that rising gold prices often mean that something is wrong, and usually in connection with monetary policy.
Rising inflation is mostly measured by rising consumer prices, but the real reason for rising inflation is the expansion of the currency supply. A higher quantity of currency means that more units of currency are chasing the same amount of consumer goods.
Is gold not an inflation hedge or was it simply ahead of inflation?
You can spin it however you want, but 2020 was a very good year for gold, which in the end also led to a new all-time high of over $2,000. The pandemic certainly contributed, as there was certainly fear buying in 2020. But the real bull market started in 2018, which suggests that the main driver has always been the same, namely real interest rates. Gold does well when people are worried about their purchasing power. In an environment where interest rates are near zero or negative, that’s certainly a given.
In addition, central banks continue to buy gold. The latest example was the Irish central bank adding $88 million to its gold reserves. On the other hand, there are almost no large sales.
Now the variable US Federal Reserve comes into play. The central bank of the world’s reserve currency wants to wind down its QE program as quickly as possible, and interest rates are also to be raised.
This leads to the question of how high interest rates should be raised because it is hard to imagine that a large jump in interest rates is still bearable given the high debt mountain of the U.S. Moreover, they do not want to shock the markets by raising interest rates too high. The markets have been driven up for some time by the liquidity injections. Which is why it is inconceivable that the Federal Reserve will let the markets fall. But that is exactly what will drive inflation even higher in the long run and keep real interest rates negative. A very bullish environment for gold.
Therefore, one should perhaps not ask why gold could not keep up with inflation last year but one could now ask why gold is still alive despite various negative headlines.