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Gold can become more relevant in the next few months as a hedge against systemic risk, inflation, and currency devaluation
Chief Investment Office16 Nov 2021
Photo credit: AFP Photo


Gold pops with higher inflation

We believe gold is on track to meet our USD2,000 target as inflation worries grow. With inflation rising to 30-year high, and persistent signs of oil above USD80/bbl, global supply chain woes, and a post-pandemic recovery in its early stage, the case for higher price pressure to persist in the coming months is probable.

As a hard asset, gold has long been considered as a hedge for inflation. Indeed, when measured against the consumer price index (CPI), gold had outperformed CPI on a long-term basis. Data has also confirmed gold protects even better during periods of hyperinflation. Based on our calculations, CPI will stay high at above 5% until May 2022 and wage pressure from a tight employment market poses upside surprise.

Figure 1: Gold performs extremely well in a highly inflationary environment


Source: Bloomberg, DBS

Intuitively, higher inflation refers to a strong economy where there is discretionary spending power. India, one of the two biggest jewellery consumers of gold, is forecast to grow at 9.5% for fiscal year ending March 2022. This should continue to support gold demand from an economy that is so in love with gold, where individuals use gold to demonstrate wealth and for financial insurance. Although China’s growth will be slowing next year, gold’s demand from China has been stable throughout the years. 

Figure 2: Gold jewellery consumption is resilient in China and recovering in India

Source: Bloomberg, DBS. * extrapolated from 3 quarters of data

Meanwhile the beginning of the Federal Reserve’s quantitative easing (QE), which showed little tantrums, should clear the uncertainty for gold prices for fear of a repeat of a selloff post liquidity tightening similar to 2013. This time round we see that gold did not benefit from QE as much as other asset classes, and hence a selloff in gold because of quantitative tightening (QT) is less likely. Additionally, real rates are in deeply negative territory now, which reinforces the relevance of gold as a store of wealth amid high inflation.

Figure 3:  Gold did not benefit as much from QE compared to during GFC

Source: Bloomberg, DBS

Figure 4: QE has strengthened Bitcoin 5.3x, making it more vulnerable to Fed’s liquidity withdrawal


Source: Bloomberg, Statista, DBS

Under a high inflationary environment, markets should be prepared for a sooner-than-expected rate hike. Various Fed measures and survey-based measures such as core CPI, PCE inflation, and inflation breakeven are pointing to significant broadening of price pressures which the Fed cannot ignore. US President Joe Biden has declared addressing inflation a top priority. The scenarios of runaway inflation hurting growth and consumer sentiments, and rate hikes impacting stock market sentiments are uncertainties that investors have to grapple with and insure against.

We believe that gold which outperform most major currencies can be used as a hedge for weak currencies as it trades in dollar and can be attractive in the current low interest rate environment.

Figure 5: Gold has outperformed most currencies and thus is an effective hedge for non-dollar holders

Source: Bloomberg, DBS

As a hedge against systemic risk, inflation and currency weakness, gold can become more relevant, the risk reward for gold thus remains favourable in the next few months.

Figure 6: Inflation will stay high for the next few months due to base effect and oil prices

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