Gold and inflation: what the experts think
● Zimbabwe’s ZiG
“Zimbabwe has a painful relationship with money,” said Lionel Laurent on Bloomberg. At the height of its 2008 “hyperinflation”, the country’s “billion- and trillion-dollar notes could barely buy toilet paper”. The situation today isn’t quite so serious but, with inflation at 55%, the Zimbabwean dollar has lost some 80% of its value this year. No wonder people are increasingly turning to the US greenback. In response, Zimbabwe’s central bank has launched a new “goldbacked currency” to replace the old dollar and introduce some hoped-for stability, said Tim Wallace in The Daily Telegraph. Dubbed Zimbabwe Gold, or ZiG, the new currency looks to have arrived at a good time – the gold price hit a fresh record high of $2,365 an ounce on Monday. But “a gold-backed currency is no guarantee of price or economic stability”, according to UBS economist Paul Donovan. “Like any other commodity”, gold’s “relative value goes up and down”. The ZiG alone won’t get Zimbabwe out of the woods.
● Puzzling movements
What has been powering gold? “The volatile situation in the Middle East” has been one factor, said Nick Cawley on DailyFX: gold still retains its status among “haven assets”. But underwhelming US economic data has been a big driver, too. Gold is up by more than 18% since mid-February, which has “puzzled” some onlookers, said Bloomberg. Inflation remains uncomfortably high for the Federal Reserve, which might have boosted gold’s popularity as a hedge. But stickierthan-expected inflation has also dampened market expectations of rate cuts this year – traders now reckon there will be only two quarter-point reductions, not three. That should be bad news for gold, which doesn’t pay interest and, “in theory, becomes more attractive when rates are lower”.
● Gold vs. gilts
The price of gold is actually being driven by “strong underlying momentum”, said Ole Hansen of Saxo Bank. “Fomo is on clear display.” Indeed, I reckon this should be a “klaxon”, said Moira O’Neill in the FT. “It’s time to examine reasons for holding it.” You may feel that “apocalypse planning” requires clinging onto more gold. But when it comes to protecting your assets against inflation, government bonds are probably the better option.