Has gold stopped protecting against inflation?
Stable value
Posted by MoneyController on 28.11.2022
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Many investors have certainly wondered in recent months whether gold could continue to be an asset that could counteract the effects of inflation. Among many contributions, it is interesting to report an analysis by manager and asset manager Gottfried Urban published in the magazine 'extraETF'.
Gold is traditionally regarded as a safe haven asset. Like other safe haven assets, the precious metal would therefore act as a diversification tool within an investment portfolio. Gold, in fact, can boast of possessing intrinsic value as a precious and luxury good. Urban states that one has to take into account, however, that those who advertise gold may be projecting economic scenarios that are often more dramatic than they should be. For example, for the manager, the collapse of the currency system is currently unrealistic. For this reason, gold can be seen, he explains, rather as 'an insurance premium' in case such an unlikely scenario materialises.
But does gold, then, protect against inflation or not? To answer this question, Urban explains the mechanism of gold prices. The prices of the precious metal depend to a large extent on extraction and production costs. If the price of gold falls below a certain threshold, extracting and processing it is no longer profitable, the supply is reduced and the price rises again. If, on the other hand, the price of gold rises, so do the profit margins of those who extract and process it; the supply then increases and the price of gold at that point begins to fall.
In the case of gold, it therefore seems possible to assess a price ceiling and a price floor precisely on the basis of production costs. In general, for Urban, the price of gold should never fall below the threshold of production costs, as well as undergo price increases of hardly more than 50 per cent of its value (understood as the sum of all costs related to extraction and production). Now, the manager speaks of a possible increase in production-related costs to $1,500 per ounce in 2023. This means that his estimates foresee a gold price that may fluctuate between a minimum of $1,500 and a maximum of $2,100 over the next year.
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