The current economic situation could lead to a stagflation scenario, characterized by high inflation and a recession in economic growth. The risk is greater in Europe than in the United States, due to its more delicate economic position and the rise in prices of raw materials. In this scenario, the price of gold could skyrocket, since it is an asset that protects against risk and diversifies the investment portfolio.
In a report published these days, analysts from the World Gold Council Johan Palmberg and KrishanGopaul assess the impact that a stagflation situation like the one recorded in the 1970s would have on the gold market, characterized by low economic growth, high inflation, and high unemployment.
According to the report, the European Central Bank discussed, during its last meeting, the possibility of a ‘stagflation shock’ in the Eurozone, although not a direct stagflation situation.
The situation is more complicated in Europe than in the United States, due to the threat of the Ukraine war, which has worsened a situation marked by the slowdown in the growth of the money supply, and the reduction of confidence and business activity.
The war has also caused a notable increase in the price of such essential supplies as natural gas.
By contrast, in the United States, the situation is different: although inflation is at its highest point in half a century, economic data is still in expansionary territory. However, analysts at the World Gold Council noted that an environment of stagflation is taking place, with indicators pointing to a risk of slower growth and higher prices.
The Role Of Gold
In stagflationary economic environments, gold is the asset that tends to appreciate the most, while those with the highest risk are those that suffer the most pronounced falls.
Thus, in the four economic cycles that have occurred since 1973 (prosperity, reflation, stagflation, deflation), gold is the asset that has registered the highest average annual revaluation, with 54.7%.
As can be seen in the following table, the precious metal is the best asset in times of stagflation, with a huge difference compared to the rest (+32.2%).
According to the World Gold Council report, the consistent revaluation of the price of the metal so far this year is consistent with its historical evolution in stagflation environments, at first behind commodities and then surpassing them.
“Regardless of the motivation for the current general interest in gold, it is doing exactly what an element of diversification and defense of the investment portfolio should do: offer protection when the rest of the assets are falling ”, stress the analysts.
In this case, gold is also benefiting from the subdued performance in bonds: the US Treasury bond index has fallen 6% year-to-date and even the invasion of Ukraine has barely made a difference. slight ascent before resuming the descending path.
“If growth slows significantly and stagflation materializes, history suggests bonds should soar and yields fall,” the report said.
In conclusion, the World Council analysts highlight that gold has important favorable factors at the moment: weak stock markets, geopolitical risk, and skyrocketing inflation.
“Should the current situation morph into a more stagflationaryenvironment , increasing risk, history suggests that the situation could be even better for gold , ” the report concludes.