The Disconnect Between Gold, Inflation Again Manifests as Inflation Data Is Published

Although gold has historically served as an inflation hedge, there has been a disconnect between the precious metal and inflation in recent years. Several years of crisis after crisis caused inflation levels to rise globally, but gold prices failed to rise in turn, frustrating many investors who would have used gold to preserve the value of their portfolios.

The most recent round of U.S. inflation data brought this disconnect to the fore again when gold prices failed to rise despite hotter-than-expected inflation levels. Gold’s failure to rise in value alongside rising inflation levels is primarily due to action by the U.S. Federal Reserve. In an attempt to arrest inflation levels in the United States, the Fed has increased benchmark interest rates for several months in a row.

Higher interest rates reduce gold’s appeal because it doesn’t pay interest and encourages investors to invest in alternative assets that can allow them to take advantage of high-interest rates.

The U.S. Bureau of Labor Statistics recently published the latest Consumer Price Index report, revealing that inflation was getting worse across three of the Consumer Price Index’s (CPI) four key metrics. Traditionally, investors would have reacted to this news by adding more gold to their portfolios, increasing the precious metal’s demand and causing its prices to go up.

But, with the recent disconnect between gold prices and inflation in full play, the precious metal has been selling off on higher inflation levels and rallying as inflation cooled. Rather than purchase gold and add it to their portfolios when inflation levels rise, investors are now more likely to sell their gold holdings and hold off on buying the precious metal until inflation levels cool.

Thanks to a litany of global geopolitical issues, inflation levels and benchmark interest rates have remained high for the past couple of years. This inflation spike began in May 2020 when the U.S. was in the coronavirus pandemic’s grip. As a result, many Americans cut their spending amid immense economic uncertainty.

Gold prices trended at around $1,719 through the month as significantly reduced consumer demand brought down prices across the board.

With the U.S. Fed increasing benchmark interest rates to fight rising inflation levels, it disrupted the traditional relationship between gold and inflation, making the precious metal lose rather than gain demand during economic turmoil. Several consecutive benchmark interest rate hikes by the Fed brought interest levels to historically high levels, kept investor interest in gold low and applied significant downward pressure on gold prices.

As the anticipated rate cuts manifest sometime this year, gold could surge again and gold stocks such as Freeport-McMoRan Inc. (NYSE: FCX) may see renewed investor interest as boom-chasers jump on the gold upward trend.

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