Investors hedging their bets

There is no doubt that the effects of Covid-19 are being felt in different ways across global financial and business markets. Supply constraints have resulted in bare shelves in major US retailers as transport and logistic delays frustrate consumers ready to spend as the world recovers from the pandemic. In parallel, rising oil prices are putting pressure on input costs everywhere.

There is therefore a unique combination of factors – largely post-Covid related – that has created an atmosphere of uncertainty. With demand for goods and services rising as consumers become eager to spend again, the chase for delayed stock is raising prices across the board. With increased transportation costs come even more price hikes. And, with logistics battling to keep up through a shortage of containers and the truck drivers to transport goods, prices are up even further.

It is within this context that inflationary expectations have risen. US inflation figures are now at a three-decade high. And, there are similar price rises across Europe and Asia as well.

These conditions historically have favoured investors in Precious Metals and this last week has been no exception. Economists and financial observers have spent the last 6 months questioning just how serious the inflation threat is, with many arguing that this is merely transitory. However, there are now fears that inflation may well be with us for longer and the threat posed to the broader economic recovery and currency valuations may well be more serious.

Both the Gold and Silver price have now reacted to these dynamics. Gold has flirted with prices above the $1800 mark and has been testing higher levels. While the price remains volatile, we continue to be on the lookout for further price breakouts. This would be an important foundation for the metal to sustain more positive returns for investors who will finally have been rewarded by continuing to hold Gold in the past 11 months and even increase their exposure – especially following softer prices in recent weeks.

Also significant is that the Gold price has moved upwards alongside a rising US Dollar – an unusual occurrence that indicates the seriousness of the concerns regarding inflationary pressures. Inflation eats into the value of hard currency holdings and Gold & Silver have historically enabled investors to withstand these headwinds to secure their portfolio valuations in times of uncertainty. The multi-decade highs for inflation have spooked investors who are again returning to the relative safety of Precious Metals as a hedge against rising prices.

Inflation vs. Interest rates

With Gold and Silver largely being driven by inflationary fears, there remains a concern that an early increase in US interest rates can dampen the momentum of the metal’s advance. However, the US Fed is reluctant to advance rates too rapidly given the broader instability this can cause for both the US and Global economies. Assuming a more methodical and slower interest rate rise, there remains good potential for Gold & Silver to hold their gains and advance further into the new year.

It’s a battle therefore between inflation and interest rates that is both pushing Gold higher and also pulling it back. Despite this, it is clear that investors are looking to hedge their portfolios against the damage that an extended bout of inflation can wreak on the global economy. Gold Bullion sales have increased in Germany over this last month as German investors digest their rising inflation figures. With the holiday season approaching, sales of Jewellery are also likely to keep prices relatively buoyant.

Markets will be looking at broader US economic data over the next few weeks as the year draws to an end. The strength of the US Dollar is also important especially for South African investors facing weaker ZAR/USD exchange rates. Rising Covid numbers in Europe also are a reminder that the pandemic is still a possible dampener on economic growth. We are also mindful of the market reaction to the reappointment of FED chair Jerome Powell and the volatility that this has brought to metal prices.

In the face of all these factors, both Gold and Silver have rewarded investors who have stayed the course, and their potential for more solid returns remains on the upside.

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