On 28 September, the major US and European stock markets fell sharply, and the next day the Asian markets confirmed this warning at the opening. Investors are increasingly concerned about a much slower-than-expected economic recovery and are worried about a return of stagflation: what exactly is this? Why are precious metals an effective hedge against stagflation?

Stagflation : definition

The term was first coined in the UK in 1965 to refer to a situation of no or very low economic growth, combined with high unemployment, even though widespread price rises were leading to runaway inflation.

Stagflation subsequently hit all industrialised countries in 1973/74 due to the OPEC oil embargo on the price of oil (+70% increase), together with a decrease in their oil production.

Precious metals' protection against stagflation

In a context of stagflation, stock market shares lose their value and the rise in government borrowing rates leads to fears of a sharp fall in the bond markets. This pattern benefited precious metals, especially gold, silver and platinum, whose prices always benefited from inflation and were a long-term hedge.

During the 1970-1980 decade and its two oil shocks, US interest rates fell drastically and remained at negative values, pushing gold and mining stocks to outperform during this period; between 1 January 1970 and 1 January 1980, the price of gold rose by 1754%, i.e. an inflation-adjusted rise of 801%.

Investment in precious metals during stagflation

Currently, the concern about stagflation is once again putting pressure on the markets. The reasons are mainly the rise in energy prices (+17.4% in the eurozone in September), the spectre of a US default as early as October 18, as well as shortages in many sectors, even in labour.

These facts are hurting economies and global growth, but they offer protection for precious metals investments over the long term.