Rising inflation causes flight to gold

May was the best month for gold since July last year. The precious metal is benefiting from rapidly rising inflation rates, making investors more concerned about currency depreciation. For example, inflation in the US rose to its highest level since 2008 in April, while inflation in Germany reached its highest level in three years. Despite this, central banks are sticking to their loose monetary policy, believing inflation to be transitory. It is causing a flight to gold, an investment that traditionally yields well at low real interest rates.

The Gold price At the end of May, it was around €50,300 per kilo, while a month earlier it was around €47,300. That's a 6.3% price gain, the biggest one-month increase since July last year. At that time, the precious metal was still on its way to a new all-time high From more than $2,000 per troy ounce, the precious metal is now recovering from a relatively weak first quarter, in which the price fell to $1,700 per troy ounce. In March, the gold price reached the Lowest level in a year. Now that interest rates are not rising any further and inflation is rising, the outlook suddenly looks a lot more favourable.

Gold price is back above €50,000 per kilo

Silver price nears €750 per kilo

Inflation pushes gold price higher

At the beginning of this year, investors reduced their positions in the precious metal, as their attention was focused on rising interest rates and the prospect of economic recovery. The gold stocks of ETFs, investment products that hold physical gold, returned to growth in May for the first time in four months. According to John Reade of the World Gold Council, 60 tonnes were added on balance in May, driven by North American and European ETFs. Investors are also building up a larger position through the futures market. According to Bloomberg hedge fund and speculators' long positions rose to their highest level since January.

Due to the improving economy, the demand for oil and other raw materials has risen sharply, resulting in price increases. In addition, there are logistical problems and production restrictions related to the coronavirus, which causes longer delivery times and higher transport costs. Some of these factors are temporary, but many investors believe that the accommodative monetary policy of central banks will cause structurally high inflation. Low interest rates on savings also continue to play a role, as this makes it possible to Buy gold Attractive.

ETFs added gold back to their inventories in May (Source: World Gold Council)

From crypto to gold?

It is also conceivable that the precious metal benefited from massive volatility in the crypto market last month. After a stormy rally at the beginning of this year, a sharp correction in Bitcoin and many other virtual currencies followed in May. The price of Bitcoin fell from $58,000 to $38,000, while other virtual currencies also fell. As a result, about $1 trillion in market value evaporated from the crypto market in a short period of time. Gold knows much less large price fluctuations and is therefore more attractive as a safe haven and as an alternative to the savings account. Earlier, the advance of Bitcoin seemed to put pressure on the gold price.

Gold price moves in line with real interest rates in the US

This contribution was made from Geotrendlines