Thanks for Acknowledging the Inflation Elephant
There’s always a dance between gold and inflation.
As an inflation hedge, gold should do well in inflationary environments. The rationale is two-sided. On one side, investors turn to gold to protect their wealth when inflation is eroding the value of bank accounts and bonds. That’s the classic inflation hedge/safe haven argument. On the other side, gold faces less competition as a safe haven when inflation is running because bonds perform poorly, with both capital and yield getting eroded.
That all says gold should go when inflation rises. But nothing is ever simple.
The complication here is that central banks usually raise interest rates to combat inflation. And higher rates reduce gold’s appeal from both sides: higher rates boost bond yields, helping the safe haven competition, and (2) higher rates cap the inflation that’s eroding bank accounts and keeping real yields negative (at least, that’s what rate hikes are supposed to do).
So how gold reacts to inflation depends on the context. New inflation in a low-rate environment probably supports the yellow metal while slowing inflation in a high-and-rising rate environment probably doesn’t. The Fed controls the wide swath in between through its hold on interest rates.
That
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