How Does Inflation Affect the Price of Precious Metals?

A topic we are often asked about by those new to investing in precious metals is inflation and its impact on the price of gold and silver. This article will cover the causes and effects of rising inflation, and the reasons for its powerful influence over the precious metals market.

What exactly is inflation?

Inflation is the rate at which the purchasing power of a currency is falling, and consequentially, the sustained rise in the price of goods and services. Inflation causes a currency to reduce in value and affects everything from mortgages and the cost of our everyday shopping, to the price of gold and silver.

Causes and effects of inflation

The usual cause of inflation is often an increase in raw material costs, fuel costs, or a surge in demand for products and services. This sees the prices of the production of consumer products rapidly rise, which is then passed along the supply chain and on to the customer.

During times of rising inflation, central banks usually attempt to ease the pressure by increasing interest rates in order to slow the economy and bring inflation down, which is bad news for mortgage owners and borrowers. Unemployment also often rises along with inflation, due to struggling businesses, as the economy shrinks.

Inflation greatly affects the general population as struggling households attempt to deal with the higher cost of living by tightening their belts.

How does inflation affect the price of gold and silver?

Inflation has a powerful influence over precious metals, often pushing the price of gold and silver up.

Historically, precious metals have often been used as safe-haven assets during times of economic adversity such as rising inflation. Because their supply is limited and they are a tangible commodity, gold and silver’s value tend to hold during periods of high inflation as investors turn away from stocks, bonds, and other markets, pushing the demand and the price of precious metals higher.

The price of gold and silver also increase with the value of inflation because they are currency-denominated commodities. As inflation rises, consumer goods become more expensive, and because the price of gold and silver are denominated in pounds/dollars, this means that its value will increase with the rising inflation rate.

Investing in gold and silver

If it appears that inflation will worsen in the coming years, then gold and silver investment might be a worthwhile investment for those looking to protect themselves from economic pressures.

The presence of ‘black swan’ events leading to global economic threats such as the Covid-19 pandemic have certainly underlined the importance of holding physical, tangible assets such as gold and silver coins and bars rather than fiat currency, bonds or similar assets that devalue when inflation is high.

This blog represents one person’s opinion only. Please note, gold and silver prices may go down as well as up. Atkinsons Bullion & Coins accepts no responsibility for any losses based on information we have provided. We do not offer investment advice. Please carry out your own research before making an investment decision.