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Overview of gold and its historical function… Gold, which has always been seen as a store of value, protection tool, investment tool or value standard throughout human history, has been an important part of both the economy, the financial system and the markets with these features. Until very recent… Overview of gold and its historical function… Gold, which has always been seen as a store of value, protection tool, investment tool or value standard throughout human history, has been an important part of both the economy, the financial system and the markets with these features. Until very recently, when the Bretton Woods system collapsed, gold allowed the financial system to function as a standard of value. Gold is known as a safe haven within the framework of a general belief, and therefore it stands out as a means of protection in situations of fear, anxiety, uncertainties in financial markets, crisis, political instability, war and conflict. There is a positive and statistically significant relationship between political and financial stability indicators and stock market returns. Perception of security… The 2008 global financial crisis marks an important turning point for investors to remember safe havens such as gold. In the post-2013 period, when it was thought that global economies had overcome the effects of the 2008 global financial crisis, major central banks tended to put an end to the loose monetary policies they implemented to get out of the crisis. The evolution in the monetary system… In the process that included the collapse of the empire on which the sun never set, the golden age lasted until 1930, during the depression period and this crisis between the two world wars between 1930 and 1944, the gold standard had already begun to show signs of distinction, and important economies such as the US and England were able to maintain this position. After the collapse of the Bretton Woods system in 1971, the USD became the centerpiece of the international monetary system. The weight of the American economy in the world has given the United States a privileged place in the international monetary system and assumed the role of reserve money and key currency. Inflation protection motive… Gold and inflation have a common tendency in the long run. Although this relationship weakens from time to time during periodic breaks, especially liquidity-related crises, it generally acts together in the long run. During the global crisis, the US tried to increase the liquidity in the market by lowering the interest rates and thus to support the inflation. As a result, the USD depreciating due to the abundance of liquidity and interest rates close to zero started to revive economic activity. Inflation has also risen. Increasing money supply had a positive effect on consumption and investments, and in this context, it was observed that the physical demand for gold also increased. There is a positive relationship between gold and inflation variables, but this relationship can be broken in certain periods structurally. This is linked to cyclical changes. In this context, the long-term relationship between gold and inflation is not strong in all periods of the market. This is due to the temporary tightening and expansion of monetary and fiscal policies. Gold price adjusted for inflation… The increase in the general level of prices in the economy, namely inflation, negatively affects disposable income and purchasing power. In general, gold has been held as an investment tool for many years to protect the value of money or assets against inflation. This is not only for individual investors, but for Central Banks to diversify their portfolios for long-term balance sheet management (asset and liability management). Of course, since this gold is held as a hedge against inflation, prices need to be adjusted to the general level. Inflation-adjusted gold price is based on US inflation. The reason for taking US inflation as a reference is because it is the largest of the global economies. While the US 10-year bond yield is taken as the risk-free rate, the US inflation rate expectations used by the Fed are also considered as a criterion for measuring inflation. When we examine the adjusted gold price for the period 1950-2018, we see that there is a general trend from 1950 to the end of the Bretton Woods system. The trend is more horizontal until the end of Bretton Woods, after the collapse of the system, the price adjusted for inflation tends to increase, especially during inflation periods. Although inflation is the main determinant, in the long run, the difference between the nominal gold price in US dollars and the adjusted inflation price is corrected. Inflation-adjusted gold price increases are generally seen as periods of increased inflationary risks, such as the 1973 and 1979 oil crises, the 1985 Plaza Agreement, the 1987 Black Monday, and the expansionary monetary policies implemented after the 2008 global crisis. Gold/silver ratio… Various factors such as economic and political crises, natural disasters, monetary policies of central banks cause high volatility in currencies. In such crisis situations, investors may not want to invest in foreign currency. Gold is seen as a safe investment tool as it is always available as a type of reserve in Central Banks. Increased demand drives up gold prices, and investors may be reluctant to invest more in the wake of rising gold prices. This is due to the feeling that prices have reached an extremely high level, followed by a sharp drop. Silver lags the price of gold and can differ significantly from the price of gold due to industrial usage differences. If investors still do not trust risky assets, if gold prices have reached the point of overbought i.e. low risk appetite, they can alternatively invest in other instruments such as precious metals or commodities such as silver. In this case, investors will be able to diversify their portfolios and find opportunities to gain high profits by taking positions at low silver prices. Therefore, the ratio of gold to other commodity group instruments can be an important indicator. In financial markets; Ratios such as gold/silver, gold/copper, gold/oil, gold/palladium, gold/platinum are followed by many individual investors and hedge fund managers for speculative positions. The gold/silver ratio is one of the most popular. The gold to silver ratio shows how many ounces of gold coincide with silver. Investors use this ratio to compare gold and silver values. This ratio helps determine the best time to buy when one of these precious metals is preferred over the other or when one is preferred over the other. When this ratio is low, gold is cheaper and therefore more preferred than silver, and silver can be considered cheaper when the ratio is high. Conclusion? The global epidemic caused the monetary policies implemented to provide an unusual amount of liquidity. The low interest rate and high money supply created by this had a marginal impact on inflation in an environment where supply chains were disrupted by post-pandemic dynamics. Increasing inflation is actually a result, and a consequence of the increase in inflation is the need to protect financial assets from erosion. At this stage, value retention judgments come into play and push investor behavior towards creating alternatives. Kaynak: Tera Yatırım Hibya Haber Ajansı

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The role of gold in inflation dynamics