Conventional wisdom has it that when inflation gains, so does gold, as investors turn to it as a hedge against rising prices.
Conventional wisdom has it that when inflation rises, so does gold, as investors flock to the precious metal as a hedge against rising prices.
But that hasn’t been the case this year. The consumer price index soared 9.1% in the 12 months through June, while gold has slid 6.3% this year.
Of course, this isn’t the first time in recent years that gold has diverged from inflation. While gold jumped from 2008-11, inflation remained quiescent.
It’s interesting to note that the prominent investor Cathie Wood, chief executive of Ark Investment Management, views gold as a better indicator of inflation than the CPI.
She says gold is a leading indicator, while the CPI is a lagging one, and she says we’re in a deflationary period rather than an inflationary period.
Another piece of conventional wisdom is that gold benefits from geopolitical turmoil, acting as a safe-haven investment. But the war in Ukraine and other global tension obviously haven’t done much for the precious metal this year.
Gold Versus the Dollar
One rule of thumb that is holding up for gold is that it moves in the opposite direction of the dollar. The idea there is that gold is priced in dollars, so a rising dollar makes it less expensive.
In addition, gold is viewed as a hedge for a falling dollar. So now that the dollar is rising, there’s no need to buy the hedge. The Bloomberg Spot Dollar Index has climbed 9.2% so far this year, which counts for a major move in the currency market.
Another traditional thought about gold that is holding true: It moves in the same direction as the economy. The idea is that weak economic growth implies weak inflation, which hurts gold.
And indeed the U.S. economy shrank an annualized 1.6% in the first quarter, and many experts anticipate a decline for the second quarter as well.
Gold Versus Interest Rates
A final piece of historical wisdom being confirmed is that gold drops when interest rates rise, as rising rates put the kibosh on inflation.
The Federal Reserve has increased rates by 150 basis points (1.5 percentage points) since March and has indicated that more hikes are coming, including a 75 basis point move next week.
So what’s the outlook for gold going forward? It may “temporarily fall to levels that may surprise,” Paul Wong, market strategist at Sprott Asset Management, told Barron’s.
But “there is an adage that bear markets seldom end with a yawn and a shrug,” so “writing off gold may be early.”
