Why has the gold price fallen in 2021 despite rising inflation?
It’s been a disappointing year for the price of gold. While any type of asset can fall in value, many will be surprised at the performance of gold in a year when inflation has surged.
So why has gold performed so poorly in 2021? Let’s take a look.
How has the price of gold performed in 2021?
The price of gold has fallen since the start of 2021. In January, one troy ounce of gold was valued at £1,399. Almost 12 months down the line, the same amount of gold now costs £1,350.
The price of gold hit its lowest point in March this year when it fell to £1,217. By June it had risen to £1,350, before slumping to £1,244 by August.
The precious metal hovered around the £1,300 mark for the next three months, before experiencing a mini-rally in November, when its price topped £1,403. It has since fallen slightly to £1,350.
Why is the performance of gold surprising?
While gold hasn’t crashed in 2021 by any means, its muted performance over the past year is perhaps surprising. That’s because inflation has rocketed in 2021, officially hitting 5.1% in November. This is the highest rate seen in over 10 years!
Traditionally, precious metals such as gold perform well during periods of high inflation. For example, when the UK suffered from high inflation in the 1970s, the price of gold held its value in real terms.
Aside from past performance, gold has a reputation for holding its value because its supply is essentially fixed. This is not the case with fiat currency as the government has the power to increase the money supply at will.
For example, the Bank of England has undertaken an extensive quantitative easing programme during 2021, creating £895 billion of new money.
Increasing the money supply devalues currency which can cause inflation. This is partly why the UK has witnessed high inflation for the majority of 2021.
Why has 2021 been a disappointing year for gold?
Holders of gold have had a tough year. While the price of other commodities such as iron ore, crude oil and natural gas have all surged in 2021, one troy ounce of gold is now worth less than it was a year ago.
On a similar note, global stock markets have also risen in 2021. Both the FTSE 100 and FTSE 250 are up over 11% year to date, while the S&P 500 is up a massive 25% over the same period.
These are all signs that gold is no longer an effective store of wealth. In light of this, here are three reasons why investors may have started to turn their backs on gold.
1. Lack of dividend income
Gold is officially an ‘unproductive asset’. In other words, if you hold gold you won’t earn any passive income. You must instead rely on its value increasing over time in order to make a profit.
This is not the case with stocks and shares that have potential to rise in value and may also pay dividends.
2. Storage costs
If you buy gold, then you must find somewhere to store it. This comes at a cost.
Such costs do not apply to stocks and shares, which can be stored on a virtual platform at the click of a button.
3. Cryptocurrency becoming more popular
Whatever your thoughts on cryptocurrency, digital money has surged in popularity in recent times, especially among the younger generations. As a result, it’s entirely feasible that the growing interest in crypto has helped to cool the demand for gold.
Unlike gold, cryptocurrency is easier and cheaper to store, and it can easily be bought and sold. However, cryptocurrency remains an unregulated asset in the UK.
How will the price of gold perform in 2022?
Predicting the future is never easy, especially when it comes to estimating the future price of a particular commodity.
However, given that gold has had a poor year, some investors may believe that it is currently undervalued. Others may be inclined to believe that the gold price will only surge should inflation really start to take off in 2022.
And while gold has had a disappointing 2021, it is worth bearing in mind that 2020 was a much better year for the precious metal. A troy ounce of gold rose by £250 in 2020, proving that gold can rise substantially over the course of a year. Whether this will happen in 2022 remains to be seen.
Are you looking to protect your wealth from rising inflation? From gold to real estate, see our article that explores sectors that fare well during high inflation periods.
The post Why has the gold price fallen in 2021 despite rising inflation? appeared first on The Motley Fool UK.
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