Is gold an effective hedge against inflation? What to expect from the strong dollar?

IBIS InGold Editorial Office

29. 11. 2022

At first glance, it may seem that inflation (e.g. in the USA) is slowly starting to leave us, and its curve in the Czech Republic is at least slowing its growth. At a second glance, however, we can see that it is not only the eurozone that is struggling with rapidly rising inflation, but also, for example, Germany, where the annual inflation rate is holding at 10%. Meanwhile, Germany is particularly sensitive to inflation. Moreover, it can be assumed that due to the interconnectedness of the economies, German inflation will soon begin to spill over to us, the domestic market.

Central banks are trying to fight inflation, mainly by raising base interest rates. The Czech Republic was one of the first countries to raise its base rate to 7% and the CNB is holding back inflation by stabilising the crown exchange rate and through massive interventions. If in the past the very relaxed monetary policy of central banks sowed wind, today, financial markets are suffering from a storm of loss in the value of practically all asset classes.

We can protect ourselves from the consequences of the previously too relaxed policy of central banks with a traditional protection, and that is investing in physical gold. It may seem like gold isn't growing as fast as we'd like, but you can't buy insurance if your house is already on fire.

The beginning of the current crisis can be traced back to mid-2019. Since then, the yellow metal has appreciated by 35% in euros, which has covered the rate of inflation in the eurozone, which has reached 14.1% in three years. Gold is therefore a truly effective hedge against inflation and economic crisis. Given thousands of years of experience with gold, it can be assumed that it will continue to be assurance for our finances. It can also be seen in national currencies where the precious metal is more valuable than in the currently stronger dollar. While the price of gold in US currency has risen by more than 18% since the first half of 2019, gold has improved by 35% in euros.

The strong dollar, confidence in the US economy and the actions of central banks, which will monitor inflation and the strength of their national currency, will have a major impact on the gold price. Either way, the gold bull run scenario is one of the most likely possibilities. However, the future cannot be predicted and the impact of extraordinary events underestimated. The long-term investment strategy is the most stable one. Only time will give us a true answer to the development of the price of gold.