Why Gold Is Unexpectedly Faltering During Inflationary Times

With the cost of living increasing drastically and inflation at an all-time high, assets such as gold that have traditionally acted as stores of value should be in hot demand. Conventional wisdom says that markets should turn to gold at times like this as a hedge against inflation. However, gold has acted contrary to expectations in recent months, faltering amid inflation, an increasingly hawkish stance from the Fed and a surging dollar.

Gold prices went down by more than 1.5% in September, trading at as little as $1,643 per ounce and reaching a two-year low. OANDA senior analyst Edward Moya stated at the time that the increasingly valuable greenback was going to keep gold “vulnerable in the short term.”

Against conventional wisdom, gold prices have continually faltered at a time when they are expected to remain steady. With markets rushing to store their returns in gold, prices for the precious metal should be rising, but they have gone down by more than 7% over the past 12 months instead.

This is partly due to moves by the U.S. Federal Reserve to forestall inflation through tighter monetary policies. The Fed has raised the benchmark interest rate by 75 basis points for more than two consecutive months, increasing the opportunity cost of holding gold bullion and reducing its appeal to investors.

Central banks around the world have followed the U.S. Federal Reserve and increased interest rates in their respective countries to contain the ongoing inflation. Given that the global economy mostly runs on the dollar, high-interest rates have helped to increase the value of the greenback and reduced gold prices in tandem.

During the 2013 taper cycle, for instance, an 18% surge in the greenback’s value caused gold prices to go down by 16%. However, while the dollar rallied by 17% in last year’s cycle, the gap between the rise in dollar value and the drop in gold prices has been significantly less.

This is mostly because the economy wasn’t really dealing with any inflation during the last taper cycle, leading gold prices to act in accordance with conventional wisdom.

However, the global economy has faltered over the past couple of years, with Russia’s invasion of Ukraine earlier this year finally pushing things over the edge. Food and energy prices are at an all-time high, the cost of living is rising steadily, and experts predict that there will be a recession in 2023 and 2024.

If economic conditions remain as they are in this cycle, gold may not be regaining its status as a store of value any time soon, but miners such as Royal Gold Inc. (NASDAQ: RGLD) may not be too bothered by these periodic market movements since history shows gold will always bounce back.

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