Worried About Inflation? Gold Might Be The Solution

The comments above & below is an edited and abridged synopsis of an article by Frank Holmes

In its outlook for 2018, Thomson Reuters GFMS analysts see gold prices rising to $1,500 an ounce sometime this year on inflation fears. This would put gold at a level unseen since April 2013.

The price appreciation could be driven by “concerns that the United States may pull out of NAFTA,” the trade pact the US shares with Canada and Mexico, its largest trading partners.

The Trump administration has already imposed tariffs on Canadian lumber, and it set steep tariffs on imported washing machines and solar panels, all of which is inflationary. The same goes for the recently passed tax overhaul, which has prompted some companies to raise their minimum wage.

If the administration withdraws from NAFTA, prices on consumer goods and services could become destabilized and begin to surge.

In anticipation of this, investors should consider adding to their gold exposure, because gold has a history of performing well in times of rising inflation.

Annual gold returns were around 15% on average in years when inflation was 3% or higher year-over-year, between 1970 and 2017. In real (inflation-adjusted) terms, returns were closer to 8%.

According to the World Gold Council, gold returns have outpaced the US consumer price index over the long run, due to its many sources of demand. Gold has not just preserved capital, it has helped it grow.

Having a 5% to 10% weighting in gold and gold stocks, then, could help investors minimize their losses in other asset classes.

Tariffs and higher wages aren’t the only fear trade factors moving gold prices right now. A weaker US dollar, relative to other global currencies, deserves credit as well.