Inflation causing traders to turn to gold

Business man on stock market crash financial trade indicator background.

Gold has often been used as a hedge against inflation, and it looks like this trend may be repeating itself.

Here’s what’s going on and the reasons causing a shift in investing attitude amongst traders.


Inflation figures change investment behaviour

Recent trading activity at shows that investors are rotating away from higher-risk assets like meme stocks and cryptocurrency.

Instead, they are moving into the ancient medium of exchange: gold.

Trading in gold is sometimes seen as a bit uncool or boring. But some bubble stocks are popping, the cryptocurrency market is crashing, and inflation figures are rising. So gold is starting to look more attractive.

Investors are becoming more cautious

Market sentiment seems to be shifting to a more wary approach. David Jones, chief market strategist at explains the changing landscape: “The nagging worry for investors at the moment is still inflation. This goes some way to explain activity by our clients this week.

“Gold was one of the top-traded assets by our users. Traditionally seen as a hedge against inflation and uncertainty, the yellow metal hit its best levels for a month on Thursday (15 July 2021) – although it is still around 12% off its all-time high set last August.

“This was despite, or perhaps, because of, comments by the Federal Reserve Chairman Jerome Powell saying that inflation had notably increased, and would stay relatively high for a few months before returning back to normal.

“It has been a frustrating time for gold bugs in the past 10 months, with investors lured away by stock markets continuing to grind higher. The rise in the price of gold this week may be a suggestion that some traders think that this temporary inflation aberration may last a little longer than central bankers expect.”


Buying gold to protect against inflation

When creating your investing strategy, diversification is important. Part of the reason it’s so vital to diversify is to make sure that your investments will perform well under different market conditions.

There will be periods of low inflation and times of higher inflation. So it’s worth checking that your plan can perform well under both conditions.

Gold is just one sector that tends to perform well during inflationary periods. Because the supply of gold has no connection to a currency or regular markets, this can shield its price from the effects of inflation.

Although this has been the case in the past, there is no guarantee that the price of gold will outpace rising prices going forward.

Investing to beat inflation

Some share dealing accounts will allow you to invest in a wide range of assets. This will give you a better chance of creating a diversified portfolio that beats rising prices.

Another option is to use a platform or investing solutions provider to build and manage a multi-asset portfolio for you. This way you can have diversity without spending lots of time researching every component.

Remember that there is no guarantee investments will rise in value and you may get back less than you put in. So be sure to do your homework and realise that there is often no silver bullet for beating inflation.

The post Inflation causing traders to turn to gold appeared first on The Motley Fool UK.

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