What is inflation and deflation? How does it affect Gold or Precious Metals?

Inflation refers to the rise in prices of most goods and services of daily or common use. Whenever there is a higher demand than supply, prices will be increased and therefore, leading to inflation.

Investors holding on to tangible assets, such as property(s), may like to see inflation in the Real-Estate sector, as that will cause the value of their assets to increase. On the other hand, as whenever there is a negative in the Real Rates of Return in the Equity, Bond, or Real-Estate markets, investors will purchase Gold regularly as it is an asset that maintains value. This is because Gold, Silver, and other Precious Metals have both intrinsic and industrial value, cannot be printed at will like currencies; therefore will not be affected by inflation in the same way as food or personal services

However, investors will have to take note that the volatility of these assets can turn down the benefits of their insulation from rising prices, especially if it is only used for a short-term investment.

Deflation is when the inflation rate falls below 0% (a negative inflation rate). Inflation will cause the value of the currency to decrease over time however, sudden deflation will increase the value of the currency. This will mean that more goods and services can be bought with the same amount of currency than before this sudden deflation.

Usually, deflation happens when there is a high supply (excess production) with low demand (decreased consumption), or when supply of money is decreased (sometimes in response to a contraction created from careless investment or a credit crunch), or because of a net capital outflow from the economy.

If deflation is exacerbated, it can throw an economy into a deflationary spiral. This will happen when a decrease in price leading to lower production levels, and therefore to lower wages. This will cause a lower demand by businesses and consumers, and the price will decrease further due to the lower demand. Unemployment rate will also increase if consumers delay spending in anticipation of falling prices, as it will eventually lead to a falling economic activity.

What we see today, the big increase in money supply in support of the global economies due to the effect of the pandemic, the low interest rate to spur lending and spending, inflation seem more like a plausible event moving forward. At this moment, a portfolio with a slightly higher allocation to Precious Metals might be good as we are bullish in the longer term and this period (current price levels for Precious Metals) might be a good window to enter the market and accumulate more.

Always remember that a diversified portfolio will be important to tide investors through inflation and also remember to constantly rebalance your portfolio to achieve the best results!

Suzane