The popularity of gold may grow in 2022
Throughout 2021, gold looked doomed. The precious metal lost about 6%, although inflation accelerated to the same 6%. Did gold fade into the background for some specific reason? Not obligatory. Most likely, this is the result of investors focusing on other, more popular investments.
But times are changing. People are worried that inflation will rise faster. According to the University of Michigan, over the past 12 months, consumer inflation expectations have jumped from 2.5% to almost 5%. So how are they going to protect themselves if interest rates are still below 2%?
Investing in gold is a long-standing strategy to protect against inflation. In addition, during the popularity of gold, the shares of gold mining companies can surpass precious metals. The ten-year stagnation of gold prices compared to the peak prices of 2011-2012 forced mining companies to improve their strategies, step up their activities and strengthen their finances.
With the current lack of investor interest in the shares of gold mining enterprises, the value of these shares remains very attractive. Gold tends to rise when concerns about inflation increase. Inflation has been relatively subdued for more than ten years until 2021. Now that it is intensifying, there are concerns.
Nevertheless, hopes for the “temporary” nature of inflationary pressure are restraining these worries and the demand for investments in gold. However, the problem is that inflation creeps up gradually, after which it becomes too high to come to naught on its own. In addition, it changes its pace: at first, it grows slowly and then accelerates until it goes into a gallop, after which it drifts again, albeit at a higher level.
Periods of a slowdown are encouraging until the next jump replaces them. And this is a “normal” inflationary environment. Today’s extreme conditions and beliefs make the US particularly susceptible to rising inflationary forces. History speaks in favor of investing in gold. The period 1960-1975 shows how the acceleration of inflation can undermine stability and confidence.
It all started when the Federal Reserve got worried when strong economic and business growth in 1965 led to higher prices. (This was the year when General Motors was the leading company, and its shares reached an all-time high). So, to slow down the upward movement of prices, in early 1966, the Fed decided to “put on the brakes.”
The goal was to slow down the growth rate of the economy and contain inflation. Instead, the US central bank suppressed growth and only slowed down inflationary pressures. By the end of 1966, the Federal Reserve changed course and unwittingly supported the “running” stock market of 1967-1968, as well as aggressive financial machinations, only spurring inflationary rates.
When economic conditions worsened at the end of 1966, some investors turned their attention to mining companies. These stocks became profitable when Wall Street switched to defensive investments because the high level of inflation turned out to be stable, despite the actions of the Federal Reserve System.
Such steps were new at that time, after many years of stable low inflation, which is similar to the current situation. Thus, it is reasonable to expect that the actions of 55 years ago may be relevant in one form or another since the growing doubts about the “temporary” nature of the current conditions are becoming more assertive.
