We have seen investors and consumers alike deliberate about what the economy will look like post-pandemic. As the world emerges from the crisis, industries that have been shut down will be left surveying the widespread damage, some of it permanent. Consumers will likely be split between the fortunate ones that have been able to work and others whose livelihoods have been compromised as a result of the shutdown.
To mitigate the sever economic impact, governments and central banks globally are printing and distributing extra money to prop up parts of the economy which can no longer function at pre-Covid capacity levels. In the UK alone, an estimated £123bn has already been plugged into the economy and there are estimates that Bank of England stimulus levels could peak at £1 trillion.
Despite the argued necessity of these measures, it is almost impossible not to question the impact on inflation. This massive increase in governmental quantitative easing will have an impact on the global economy, and for asset prices in particular. While inflation is defined as the rate at which the average price level that particular goods and services increase over a period of time, it’s easier in this context to regard it as the result of a decrease in purchasing power.
The golden option
As a result, investors will often look safe-haven assets that could provide a hedge against rising prices and avoid the destructive impact of inflation. Gold price is one indicator, and at the time of writing it is seeing a ten-year high while London’s FTSE 100 tumbled 2.8 per cent, and the Eurex Exchange reported a 59 per cent month-on-month decline since April volume. Historically gold had been used as a hedge to protect against economic events including inflation or currency devaluation. Although we can expect this use to continue as a popular option, the pandemic has shown a shift in consumer interest to other safe haven asset classes.
Cryptocurrency is an alternative method of inflation protection which should not be overlooked. Although previously appearing as counterintuitive due to perceived volatility, digital assets have held their own against the stock market, unlike other commodities such as oil. The value of oil has crashed due to vanishing demand and a resulting supply excess – causing the price to fall to negative value.