City thinking, local knowledge

Should we all start buying gold?

By Questa Chartered

In September Germany went to the polls to elect a new government – and a successor to Angela Merkel, who had decided not to seek a fifth term as Chancellor.

The result was inconclusive. The Social Democrats (SPD) topped the poll with 25.7% of the vote and a provisional 206 seats in the Reichstag, with the CDU, Angela Merkel’s party, on 24.1% and 196 seats. With 368 seats needed to form a government there could, in theory, be a CDU/SPD coalition. However, at the time of writing a three-way coalition seems more likely, including the Greens (who came third with 14.8% of the vote) and the fourth placed, pro-business Free Democrats.

Inevitably this added to a sense of unease in Germany. Like all the major economies around the world Germany is suffering supply chain problems in the wake of the pandemic, and nervously watching the price of energy edge upwards.

Even more pertinently, the country is also facing up to worries about inflation. Consumer price inflation for September (on a year-on-year basis) was confirmed at 4.1%, the highest level since December 1993. While most economists see this level of inflation as a temporary, post-Covid phenomenon, there are concerns that inflation could go even higher in the short term, perhaps reaching 5% by the end of the year.

Germany, of course, has long worried about inflation, so it was no surprise to see that demand for gold coins and bars in the country recently reached its highest level since 2009. According to the World Gold Council, demand for coins and bars in Germany was up by 35% in the first half of the year, compared to a rise of 20% for the rest of the world.

Germany, though, is not alone in having such fears. In the UK inflation jumped to 3.2% in August, up from 2% in July and ahead of the forecast of 2.9% – and there are plenty of pundits forecasting that UK inflation will go even higher before it starts to come down again.

So should we all be buying gold? It is, after all, nearly always cited as the ‘safe bet’ when there are worries about inflation.

A short article like this is not the place for detailed charts and analysis, but what they do reveal is that the link between inflation and upward movements in the price of gold is not that clear. According to Reuters, ‘since the early 1980s the only sustained period of uncomfortably high inflation and good gold returns came during the depth of the global financial crisis.’

There is another important point: customers buying gold are responding to short-term worries. They may turn out to be right: they may not. We simply don’t know. But what we do know – and what we have always stressed to our clients – is that financial planning is a long-term commitment, not a series of responses to short-term events. What really matters is a long-term financial plan, that meets your long-term aims and objectives, and that is regularly reviewed with your financial advisers.

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