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How Are Inflation and Gold Related?

It is always puzzling among investors on how is possible that inflation is influencing the price of precious metals. When inflation reaches critical levels, the value of gold and silver tends to go up. This correlation should always be taken seriously into consideration in investments.

Inflation is a serious problem for any economy.

Inflation is not just a matter of having more money to spend. While it will lead to an increase in the overall amount of money circulating in an economy, it is not something to be too happy about. Inflation also means that prices of goods and services will rise, sometimes in rather spectacular fashion.
As a result, one country’s national currency will quickly lose value. Not just against other currencies, but also in overall purchasing power. Consumers will be able to buy less with the same amount of money as before. It is far from an ideal situation, and one that drives people to alternative forms of investment. In most cases, that means looking into precious metals such as gold, silver, and platinum.

Benefits of Gold in an inflation situation.

This direct correlation results in gold prices rising during such times of economic instability. People are looking to retain their purchasing power. Doing so requires owning assets that not only maintain their current value, but also have the potential to rise in the future. Precious metals are an excellent fit in this regard, as they are often looked at as safe-haven assets.

Actually, one could argue how gold, silver, and other metals are a perfect hedge against inflation. Given their relative price stability, it is the only way to not lose money in the long run. Keeping regular money in a wallet or bank account will only force consumers to spend more of it to keep up with current prices.

Central banks are therefore an indirect catalyst of bullish gold prices. When a central bank announces there will be inflation, or decides to use quantitative easing, the gold price will often respond in a bullish manner. Central banks are more than capable of making the money in any economy worth less, or even worthless. Slowly but surely, several nations are heading into “worthless” territory at an alarming pace.