Gold is the ultimate hedge against inflation: WGC

March 07, 2009

Commodity Online
MUMBAI: With several countries rushing to increase their gold reserves and more and more governments in the US and Europe announcing bailout packages and interest rate cuts, fear among investors has gone up that the impact of deflation may hit gold also.

But, the World Gold Council has set all that doubts aside by announcing that gold’s role as a hedge against future inflation will be intact.

In a recent development, the Bank of England’s decided to cut interest rates to 0.5% and increase money supply in the banking system by $106.6 billion.

This means there will be a lot of liquidity in the market and that will cause a rise in inflation.

Although investors’ main concern in the short-term is the negative effects of deflation, there is a general consensus that the risk of future inflation was heightened in the light of the bank’s announcement.

Gold has been sought out by investors in recent months as the financial and economic crisis deepens. This may become more acute as gold’s traditional role as a hedge against inflation becomes evident.

A World Gold Council spokesman said the bank’s announcement will remind investors of the spectre of future inflation and its eroding effect on wealth.

With interest rates now at the lowest level in 300 years, investors are searching to find instruments with which they can protect their portfolio from inflation's pernicious effects.

Gold tends to rise in value when paper money loses its worth, so for retail and institutional investors alike, gold’s ability to preserve wealth will become even more attractive.

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