Will Stagflation Send Gold Skyrocketing Soon?

Thursday, May 19, 2016

Demand for gold continues to rise in a big way, especially from billionaires. In fact, billionaire George Soros made the decision to cut his investments in US stocks by 37% in the first quarter, then turned around and purchased shares in the world's biggest gold bullion producer, Barrick Gold Corp. Many are blaming the increased demand for gold on stagflation. But, what is stagflation, what does stagflation have to do with the price of gold, what has it led to in the past, and is it really going on today?

What Is Stagflation

Most people have heard the terms inflation and deflation, but stagflation is a term that doesn't come up very often. Stagflation is defined as, "Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.”

Based on that definition, you can imagine that stagflation isn't a good thing, by any means. Think about it, when inflation is high, prices are high. However, when demand is low and prices are high, sales fall apart. Now, combine this all with high rates of unemployment and what we could be looking at, as the result of stagflation, is an economic collapse.

What Does Stagflation Have To Do With The Price Of Gold

Although it may seem as though stagflation and gold are two very different topics. The reality is that the two are actually incredibly related. The reality is that, as a safe haven investment, gold usually gains in value when economic or market conditions aren't doing very well. When stagflation is happening, it's a sign that economic and market conditions are on a downward trend. So, when stagflation is happening, it's generally a sign that gold is going to increase in value!

What Stagflation Has Led To In The Past

As you could imagine, stagflation is not a sign of positive economic times to come. However, it has historically been a sign of positive movement to come for the price of gold. In fact, in the 1970's, stagflation was a signal of economic hardships to come, and the price of gold made it up to $800 per ounce, which, back then, represented a massive gain in the value of the precious metal. We also saw stagflation in late 2007 and 2008, and we all know what happened then. This was another time when the market collapsed, economies around the world went backwards, and gold climbed substantially!

Is Stagflation Really Happening Right Now?

When it comes to inflation, we are definitely seeing incredibly high levels, especially given the low consumer demand. In fact, the only thing that doesn't seem to be dramatically increasing in price is oil. The only thing that doesn't seem to add up is unemployment - or does it? The reality is that economists have been boasting low unemployment rates in the United States for some time. However, they're not necessarily giving us the whole story. The reality is that people filing for unemployment are limited in number. However, the workforce participation rate leaves much to be desired. In the United States, the workforce participation rate is just over 60%. This means that nearly 40% of the United States population is unemployed, regardless of the 5% number economists and the Fed continue to throw around. The bottom line is that what we're seeing here is indeed stagflation.

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.