The higher inflation rates that have grabbed headlines for the last few months are not temporary according to one industry expert. The global head of research at WisdomTree, Jeremy Schwartz says that high inflation should be expected for as many as five years – and coupled with numerous other risks, investors should be embracing gold with much higher holdings right now.
Schwartz says above average inflation will persist despite the official ‘temporary’ position adopted by the Federal Reserve, and could even spike as high as 20%.
Speaking Wednesday he said, “One of our big picture views is that inflation is not temporary. You’ve heard this narrative from the Fed — is it temporary or permanent? And we have a view that over the next few years, you’re going to have above-average inflation from what the market has been expecting historically. The thesis boils down to all the COVID relief measures that have put a huge amount of money in the system.
“You close the economy. You put a lot of money in people’s checking accounts to offset their lost income. And as you reopen, the pent-up demand is going to come out and be this cumulative price pressure increase of let’s call it 20% over the next three to five years. It will have a more permanent impact due to that higher money supply, wage and supply pressures.”
Higher inflation is good news for gold prices and makes the precious metal a very attractive prospect for investors concerned about weaker returns from bonds. As a hedge against inflation, gold is hard to beat and something that investors should be looking to increase says Schwartz. He adds that it’s important to begin portfolio diversification now – if you couple this longer term inflation view with the buying opportunity we’re seeing present itself right now, it’s clear that this is an opportune moment to increase gold holdings.
“If inflation is much higher than people expect, that’s where you start to look for other diversifiers,” advises Schwartz. “And that’s where we think things like commodities could have a big role. We’re looking for inflation hedges and alternatives to bonds, which we believe are challenged in the face of this inflation that we expect. We’re overweight equities, overweight commodities from a traditional 60/40. Gold is an inflation hedge.”