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How does inflation affect the value of money

how does inflation affect the value of money

Wednesday, April 20, 2011

How Inflation Affects the Value of Gold

Gold bullion increases in price per ounce whenever the price of the currency in which it is denominated decreases in value. As such, there is an inverse relationship between the price of any currency and the price of gold coins and gold bullion in that currency.

The currencies of all the major economies are set to inflate for the short to at least the medium term. This is because of the 2008 financial crisis. When this occurred, the governments of the United States, the United Kingdom, and much of the European Union had their central banks engage in a type of quantitative easing. What quantitative easing is is when the central banks basically increase the money supply in order to provide more money and to counter the effects of the credit crunch.

One of the most important effects of the 2008 financial crisis was the credit crunch, which meant that many banks stopped loaning money; this made it so that it was much more difficult for businesses, entrepreneurs, and individual consumers to get the loans they need to order supplies, pay staff, construct new facilities, and invest in a wide manner of products and services.

Since the global economy is very dependent on a

large amount of consumption being done, the inability of everyone from individuals to large corporations to borrow money in order to fund new purchases and new consumption threatened the lifeblood of the global economy. To counter this, the central banks stepped in with programmes known as quantitative easing. While this has to an extent limited the amount of damage that the credit crunch could have caused, it is have the unfortunate side effect of causing inflation. This is because of the extra currency that is in circulation.

Other economies such as China and India have also engaged in inflationary monetary policies; China for instance produced a large economic stimulus package similar to that of the United States. However the stimulus package cost a lot of money.

What this means specifically for the gold price is that it will go up. The price of gold will go up because the price of gold is always related to a currency. When the value of the currency goes down like it does in inflation, the price of gold will go up; to capitalize on this, savvy investors purchase gold coins and bars. Popular gold coins include the 1oz Krugerrand, which is recognised and traded world-wide.


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