Stagflation has become one of the buzzwords lately in the markets. This is a phenomenon characterized by a combination of an environment of rising prices and a slowdown in economic growth. In other words, the situation we are experiencing right now.
In its latest Investment Update, the World Gold Council warns that stagflation is coming and explains how gold can serve as a hedge.
According to the World Council, “severe stagflation can be very damaging to both the economy and financial markets .But it is not necessary to repeat the situation of the 70s for assets to be affected. Our analyzes show that even the mildest inflationary conditions can have an impact on assets similar to what occurs in the most severe situations of stagflation ”.
Regarding its effects on investment assets, the report notes that “historically, stagflation has severely affected stocks, while both commodities and gold have performed well . “
In the case of gold, its historically good performance in these cases is attributed to several factors. On the one hand, rising inflation and market volatility encourage investors to preserve their capital.
On the other hand, the low-interest rate environment reduces the opportunity cost of investing in gold and increases investors’ aversion to riskier assets.
Gold, The Best Since 1973
The World Gold Council report reviews the appreciation of various investment assets during periods of stagflation since 1973.
Their conclusions indicate that between the first quarter of 1973 and the second of 2021, the assets that have performed best have been defensive and tangible, especially gold, while shares have been the ones that have suffered the most.
Thus, in the periods of stagflation that have occurred since 1973, the S&P 500 stock index has fallen an annual average of 6.6%, while the stock markets of developed markets except the United States have fallen 11.6% annually.
“Tangible assets have performed well during periods of stagflation, while gold has tended to benefit from the elevated risk environment, rising inflation and lower real interest rates. The significant revaluation of gold has occurred even despite the strengthening of the dollar that usually occurs during periods of stagflation”, points out the World Gold Council.
As regards the last 20 years, the only assets that have offered positive returns have been gold and bonds, in the four different scenarios that have followed one another.
In the case of gold, its average annual revaluation in dollars has been much higher than that of bonds, in some cases even doubling it.
For their part, stocks have performed very poorly, even in the milder scenarios.
In the report’s conclusions, World Gold Council analysts note that “stagflationary environments of falling revenues and rising prices have been shown to be as frequent as they are long-lasting. When they occur in their most severe form, they can cause significant damage to both the economy and financial assets.
A repeat of the most powerful version of stagflation could do gold very well, based on historical analysis, which shows that it has been the best of the major investment assets since the second quarter of 1973. ”