- July 28, 2022
- Posted by: Ramkumar
- Category: Posts
Is Gold The Right Inflation Hedge
Yesterday, the big news was the 𝐰𝐞𝐚𝐤𝐞𝐧𝐢𝐧𝐠 𝐨𝐟 𝐭𝐡𝐞 𝐈𝐧𝐝𝐢𝐚𝐧 𝐑𝐮𝐩𝐞𝐞 𝐚𝐠𝐚𝐢𝐧𝐬𝐭 𝐭𝐡𝐞 𝐔𝐒𝐃. So a journalist from a media publication called and asked about the impact of the weakening rupee on the Indian economy and IT services industry. When i gave my opinion, I looked at gold prices because conventional wisdom says that 𝗴𝗼𝗹𝗱 𝗶𝘀 𝗮 𝗵𝗲𝗱𝗴𝗲 𝗮𝗴𝗮𝗶𝗻𝘀𝘁 𝗰𝘂𝗿𝗿𝗲𝗻𝗰𝗶𝗲𝘀 𝗱𝘂𝗿𝗶𝗻𝗴 𝗵𝗶𝗴𝗵 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻𝗮𝗿𝘆 𝗽𝗲𝗿𝗶𝗼𝗱𝘀. However, gold prices are declining as the Indian rupee.
𝗦𝗼 𝘄𝗵𝘆 𝗴𝗼𝗹𝗱 𝗽𝗿𝗶𝗰𝗲𝘀 𝗮𝗿𝗲 𝗻𝗼𝘁 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗶𝗻𝗴 𝘄𝗵𝗲𝗻 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻 𝗶𝘀 𝗵𝗶𝗴𝗵 𝗻𝗼𝘄?
I believe gold’s value does not fluctuate as it has a limited supply and thus has a fixed value compared to currencies (we can print currencies as per our wish). So when gold prices increase, it implies that other assets/currencies have depreciated, not that gold has appreciated.
Let us take USD. When the Fed hikes interest rates, it limits the supply of USD making it strong against gold. On the contrary, raising debts and printing money to repay debts debase currency making it weaker against gold.
𝙃𝙞𝙜𝙝 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣 𝙝𝙖𝙥𝙥𝙚𝙣𝙨:
1)When governments (Venezuela and Zimbabwe are instances) print much money, the debt grows faster than GDP.
2)Supply shocks to commodities like oil and energy can push the demand for commodities, causing prices to rise. Here, we are not talking about currency debasement but about where demand is more than supply. We can extend this argument to the #realestate market, where underinvestment in housing projects causes high demand for housing spiralling up real estate prices.
In scenario 1, gold prices rise; in scenario 2, gold prices do not rise.
So how are governments globally handling these high inflation issues?
First, the reserve banks understand that supply lags demand, but instead of improving supply, the fed increases interest rates to suppress the demand, strengthening the USD.
When i look at VC investments in the past five years, they have allocated more capital towards SaaS and the food delivery business against skilled labour/housing/energy production. Thus, we see higher demand for the latter than the former.
Thus, 𝗴𝗼𝗹𝗱 𝗶𝘀 𝗻𝗼𝘁 𝗮 𝗰𝗹𝗮𝘀𝘀𝗶𝗰 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻 𝗵𝗲𝗱𝗴𝗲 𝗶𝗻 𝗮𝗹𝗹 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻𝗮𝗿𝘆 𝗽𝗲𝗿𝗶𝗼𝗱𝘀.