The case for gold? From despair to hope, equity markets have rallied with unbounded optimism since the depths of the crisis in the mid-March:

And while some economic numbers and figures have been, without exaggeration, the worst in a century, the worse it gets economically, the more governments and central banks can expand their mandate to do even more previously unthinkable policy actions. And that is why Gold is also approaching new, recent highs.

Headlines like these can only help the positive price action, regardless of the veracity of the underlying story, the latter’s especially spurious given how easily gold is traded. Any government that confiscated Gold wouldn’t be in power for very long.

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With all the stimulus and central bank policy action it’s easy to see the US Dollar weakening. This would be inflationary for the United States, as goods from abroad become more expensive. However as the US over the long-term attempts to become more self-sufficient in certain areas like tech (read less dependent on China) there is a risk of additional inflation from this as well. Furthermore, what if the economic bears are incorrect? What if the global economy recovers quicker than expected but also becomes more, flexible, dynamic and innovative on the back of the shock of the coronavirus?

Much complacency has been wiped away. Both businesses and consumers have taken a hard look at their costs, their excess and unnecessary consumption. This could lead to a reallocation of spending to what is deemed frivolous to what is deemed essential. The economy of the future, along with the ever-growing power of ESG (environmental, social and governmental investment regulations and norms), could be far leaner and meaner. So add that to all the stimulus and to the acceptance now of higher government intervention and there is a significantly higher chance of a rise of inflation.

This is not being spoken about at the moment. Most are looking at deflation in terms of asset values such as property, airline stocks, or business conference facilities. But in a world more nation-state based, less globalised, where food-security and medicine security are now national security and electoral priorities the days of cheap labour producing food could be over. What is essential will be needed to be produced by a trusted and secure source. This will be of significant cost. Health supplies, food, national technology infrastructure, raw materials will all need to be sourced from friendly, trusted countries. This will cost more.

Add this to the fact that essential or key workers will demand more protection and higher wages, and that unions in these professions will feel re-energised and invigorated, it’s also reasonable to assume that wage inflation in these areas will rise.

Property inside the cities will of course be under pressure. But as more and more switch to working from home permanently house-price inflation outside the city will increase. This will also be the case for warehouses as internet retailing becomes the norm. Shopping centres, already under pressure from Amazon and the like, will continue their decline unless they can offer focus their attention to services.

There will be deflation and inflation as there will be winners and losers. But overall the virus has killed a tiny fraction of the human population and done little to stunt its increasing curve of demographic growth. Governments have become more powerful, and central banks so far have been roundly applauded for their aggressive policy actions as reflected in recovering equity prices.

The positive case for Gold at the moment is clear: if the global economy collapses further, then central banks will have to print even more, and governments borrow even more – creating even more money supply. If the economy recovers quicker than expected, then the danger of inflation getting out of control rises exponentially. Both cases attract buyers of gold. The only downside to the gold price at the moment is a Thatcherite type retrenchment of the power of the state. But after the crash of 2008 and the perceived success of policy makers this time round, the libertarians will have to wait another generation, and another collapse of the centre before that happens.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme