This post is a response to the brief exchange with Faustus on the last Gold Price in British Pounds post. Today I’d like to attempt to answer the first question which is “whether gold is really as good a hedge against sterling inflation as is sometimes suggested.”
Let’s firstly review why in my opinion it is important not to forget about the damage that inflation can do to your savings. The Bank of England has a remit “to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%.” If January 2013 sees the Consumer Price Index (CPI) remain above 2%, and at 2.7% today I see no reason why this won’t be the case, then this will be the thirty eighth month in a row that they have missed their target. This demonstrates that the Bank of England’s remit actually has nothing to do with the official line presented. If it did they would have been made sacked for poor performance long ago. I therefore take inflation seriously.
If you believe that the CPI provides an accurate measure of inflation, and had the Bank of England met their remit of inflation at 2%, then £1 three years ago would have had the purchasing power of £0.94 today. Instead the current policy employed by the Bank of England, of keeping the patient flat lined at 0.5% combined with plenty of QE, means that your £1 actually only buys £0.90 worth of goods and services today. That’s a 10% loss of purchasing power in only 3 short years.
I’ve already laid out some techniques I’m using to protect myself from inflation however let’s now look if gold could be added to that list for UK Investors.
