We have seen the Federal Reserve increase rates of interest and hold those rates to deal with inflation over the years. During this period, the price of gold has been strong, with the metal recently reaching a new level of more than $2,400 in May. While the yellow metal’s price has dropped slightly since then, it’s still more than 20% higher than prices recorded last year.
With inflation demonstrating signs of moderating, the price of this precious metal may be affected. High levels of inflation are known to bolster gold’s price, with most investors using the yellow metal as a hedge against inflation. It works by affording investors attractive options for virtually risk-free returns.
Some experts believe that if inflation hit 2%, the price of gold could still increase, while others hold the opinion that the value of this metal could fall if inflation dropped to 2%. Currently, inflation in the United States stands at 3.30%.
Allegiance Gold’s cofounder and COO, Alex Ebkarian, believes that inflation dropping could negatively affect the metal’s demand, effectively lowering its price. This, he continues, is based on the Federal Reserve’s reported inflation, which only measures year over year.
If one examined inflation’s past three-year cumulative compound impact, however, the price of gold could remain strong, particularly at the start of the low inflation period. Ebkarian also believes, however, that the taming of inflation may also have a neutral impact on the precious metal. He explains that this may be brought on by the ongoing movement to dedollarize, the overall cost of interest expense, the volatility of the market and the current level of debt, alongside early signs of weakness in financial institutions led by the commercial real estate sector.
Other experts hold the opinion that additional factors may affect the price of gold more than lower inflation. Sterling Foundation Management’s CEO and founder, Roger D. Silk, states that there is no sure way of ascertaining how the price of gold will behave, even if the Central Bank brought down inflation to 2%.
Instead, Silk believes, the precious metal’s price may be impacted by broader geopolitical and economic factors beyond inflation. Therefore, while it may seem that inflation moves the price of gold, many other factors play a role as well.
If the United States attains the Federal Reserve’s 2% inflation target, it doesn’t necessarily mean that the price of the precious metal will go up or go down. This is primarily because other factors, such as political instability and government deficits, may influence gold investors who seek to diversify their portfolios.
As the price of gold moves up or down in response to these various market forces, the stocks of gold miners such as Newmont Corporation (NYSE: NEM) could also change accordingly.
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