Time & again the World Gold Council (WGC) is replying, the question, what makes gold a strategic asset? With various focus & report. The report focuses on 1: Beating inflation, combating deflation & 2: Store of value.
In the context of Beating inflation, combating deflation, the WGC said, gold has long been considered a hedge against inflation and the data confirms this: since 1971 it has outpaced the US and world consumer price indices
(CPI). Gold also protects investors against high inflation. In years when inflation was between 2%- 5%, gold’s price increased 8% per year on average.
This number increased significantly with even higher inflation levels. Over the long term, therefore, gold has not just preserved capital but also helped it grow. Our research also shows that gold should do well in periods of deflation. Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster gold demand.
Unveiling the Store of value, the WGC report say, historically, major currencies were pegged to gold. That changed with the unravelling of the US gold standard in 1971 and the eventual collapse of the Bretton Woods system. Since then, with few exceptions, gold has significantly outperformed all major currencies and commodities as a means of exchange.
And although this outperformance was particularly marked immediately following the end of the gold standard, gold has clearly continued to outperform most major currencies in the more recent past. A key factor behind this robust performance is that gold mine production has grown slowly over time – increasing by approximately 1.7% per year over the past 20 years.
By contrast, fiat money can be printed in unlimited quantities to support monetary policy, as exemplified by the quantitative easing measures in the aftermath of the Global Financial Crisis (GFC) and the Covid-19 pandemic. In these crises, many investors turned to gold in order to hedge themselves against currency devaluation and preserve their purchasing power over time.
In fact, the rapidly increasing US money supply and the low-rate environment fostered an optimal environment for gold to perform well.
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