Gold may not have a practical value as an alternative currency. It’s not possible to enter a shop and pay for any product or service in gold. However, the precious metal may have value as an alternative to cash or other assets due to its scope to help protect against rising inflation.
In the UK, CPI inflation has already reached 2.9%. It is forecast to move higher, with the recent general election result making this even more likely. A period of political uncertainty caused by a minority government which is seeking to conduct Brexit negotiations may lead to reduced confidence among investors and business leaders. The result of this could be a further depreciation of the pound following its loss of value versus a basket of major currencies in the last year.
Higher inflation may also become present in the global economy. After a decade of deflation which has allowed ultra-loose monetary policies to be pursued, an end of austerity is on the horizon. Higher spending in the US is planned by the current President, while quantitative easing continues apace in Europe.
Gold has historically been a popular asset during times of high inflation. It provides a store of value which is difficult to match among other assets. The gold price has historically responded positively to periods of above-average inflation, as well as during periods of uncertainty. With political risk in the UK and EU, as well as in the US, being relatively high, gold could therefore become a more attractive asset to own on a relative basis.
However, the process of buying and storing gold can be somewhat challenging in terms of logistics, as well as being expensive. Owning gold also means a lack of income, which can make it less appealing for investors seeking at least some kind of income return.
Therefore, buying gold mining shares could be a logical step to take. The likes of Randgold Resources (LON:RRS), Fresnillo (LON:FRES) and Centamin (LON:CEY) offer prospective dividend yields ranging from 2% to 3%, with net profit forecast to increase in 2018. Part of the reason for their investment appeal is their strong balance sheets, improving cash flow as production increases, and the relatively buoyant outlook for the gold price.
With cash offering a return which is 100bps+ lower than CPI inflation, gold could be a realistic alternative for investors who wish to protect their purchasing power. While it may not be as liquid as cash, it has historically been a relatively sound means of overcoming the threat of inflation. Investing in gold miners such as Randgold Resources, Fresnillo and Centamin could therefore be a logical means of accessing gold’s inflation-beating potential.
With CPI inflation already at 2.9% in the UK and having the potential to move higher across the globe, overcoming price rises could become more challenging for investors. For more ideas on how to successfully do so, check out the latest edition of the Master Investor magazine by signing up below.
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