Gold price skyrockets due to highest inflation since 1990

Gold prices hit their highest level in a year this week, while silver hit their highest since February. Precious metals prices skyrocketed on Wednesday amid new inflation data from the U.S. In October, inflation rose to a shocking 6.2%, the largest year-on-year price increase since 1990. It caused a flight to precious metals.

The price of gold rose from around €50,700 to more than €52,300 per kilo after the inflation figure was announced, a gain of 3.15%. The Silver price even increased by 5.9% to €710 per kilo, the highest level since last summer. Other precious metals such as platinum and palladium also benefited from this move, but gave up a large part of their gains at the end of the week.

Gold price reaches highest level in a year

Silver price to highest level since last summer

Inflation at highest level since 1990

Inflation was already as high in the US in 1990, but savers still received a decent interest rate at that time. At the time, a US 10-year government bond yielded more than 8% interest, even more than inflation. At the time of writing, that same government bond only yields 1.5%, which means that on balance you lose purchasing power.

If we look at the Federal Reserve's policy rate, the difference is even greater. Whereas in 1990 the interest rate was still around 8%, since the corona crisis the central bank has kept the interest rate close to 0%. And that has dramatic consequences for your purchasing power, which is currently falling by more than 6% year-on-year. Real interest rates - the interest rate after deducting inflation - are currently at an all-time low. Even during the high inflation of the 1970s, U.S. savers did not lose their purchasing power as quickly as they do today.

High inflation is not only a problem in the United States. Prices are also rising steadily in the Eurozone. Problems in logistics chains, increasing demand for products and rising raw material prices are driving up the prices of many products. Partly due to high energy prices, inflation in the eurozone rose to 4.1% year-on-year in October. As a result, European savers are also losing more and more purchasing power.

Inflation in the U.S. has not been as high as it is now since 1990

Real interest rates have never been so low since 1965

Gold price skyrockets

The high inflation rate in the US caused a flight to precious metals. The Gold price skyrocketed, as did the price of silver. This rally shows that the market does not have high expectations for central banks. They are still reluctant to reduce their asset purchase programmes or raise interest rates. This is a favourable situation for precious metals, which have historically performed well in times of high inflation and negative real interest rates.

Rising inflation in the US also put pressure on the US dollar. The exchange rate against the euro fell by more than a cent to $1.145. That was the lowest level since July last year. This exchange rate movement amplified the rise in the price of gold and silver in euros. With this week's price increase, gold measured in dollars also broke out of a negative trend line.

The price increase brought the precious metal back on the radar of savers and investors. Demand for physical bullion rose sharply again this week. Investors do not expect major changes in monetary policy in the short term and buy precious metals to protect their assets from negative interest rates and rising inflation.

This contribution was made from Geotrendlines