Current stagflation crisis and its effect on gold: Where are prices headed next?

After strong worldwide economic recovery in Q1 and Q2 for most countries, economic slowdown is starting to show in the US, China and parts of Europe. Despite this, prices are not slowing down and instead, Consumer Price Indexes continue to beat expectations. Inflation is now at decade highs. The combination of high inflation and a slowing economy is stagflation.

Some history on stagflation:

During the 1970s for example, growing oil prices derived from a supply shock caused prices for almost everything else to grow higher and hence increased inflation rapidly. This cost-push inflation compared to the slowing economic growth at the time didn’t follow Keynesian economic theories and hence, stagflation was coined.

Gold on the other hand, during this time, benefitted the most and grew exponentially during the stagflation period. As fears arose and as the concept of stagflation was unknown, prices for the metal bullion rose from about $35/oz in 1971 to a peak of $180/oz in 1974 before experiencing a correction and then took off exponentially from 1977 onwards where its peak was $850/oz in January 1980. This represented a 2,328% increase during the stagflation period.

Where are we today?

There has yet to be a prevalent stagflation period since 1982 although, with current data it is possible we will see it happening in Q4 of 2021. Countries worldwide are facing the effects of an economy running with supply shocks and without pandemic era stimulus. In the US, nonfarm payrolls have been hitting numbers much lower than their expected outputs. In China, the GDP growth for Q3 was recorded to be 4.9% YoY despite forecasts at 5.2%. The country recorded its lowest factory output since March 2020.

Despite all these slowing economies, we are seeing staggering rates of inflation. The increase in energy prices, especially in oil (just like in the 1970s) has been the main contributor to this inflation. The US for example, has recorded a 5.4% increase in its CPI YoY in September, even though its target inflation is 2%. The current inflation rate in the US is its highest in over a decade, when it was last high during the 2008 global crisis. Furthermore, in September, Germany hit a 29-year high inflation rate of 4.1% while its GDP grew just 1.9%.

Where will Gold go next?

It’s very hard to say. We now understand what stagflation is and we can expect many investors to run to Gold to hedge risks and park their wealth in the yellow bullion’s safe haven. Despite this, there are many factors that are acting as resistance for gold to climb higher. The US Federal Reserve’s hawkish statement indicates we can expect tapering of assets in November and soon after interest hikes which will play against gold’s favor.

During stagflation periods, the US Dollar remains strong and usually appreciates. We can see that the US Dollar has been appreciating in value which acts as a hedge against gold, a dollar denominated commodity.

Still, Gold is still seen by many as the ideal safe haven during stagflation periods.