One of the biggest catalysts for gold prices today is the outlook for interest rates. The Federal Reserve has aggressively raised interest rates over the past year in its ongoing battle to bring down inflation. Currently, as of September 2, 2024, the Price per Troy Oz. of Gold Bullion is
In addition, an unexpected banking crisis in March tightened the credit market, which may also have helped cool the economy and slow inflation.
Gold Investors anticipate the Fed will pause rate hikes and cuts sooner than forecasted.
GOLD IS A HEDGE AGAINST INFLATION
Inflation typically has an indirect impact on the prices of commodities like gold. As prices rise across the economy, investors may buy more gold and other precious metals to preserve the purchasing power of their dollars.
In the first half of 2022, for instance, demand for gold increased 12% year over year. Consumer prices rose 9.1% over the 12 months that ended in June 2022. Research shows that between 1974 and 2008 there were eight years when U.S. inflation was considered high. During those periods, gold prices rose by an average of 14.9% year after year.
Some cite correlations like this when arguing that there is a connection between higher inflation and higher demand for gold. But it’s impossible to say whether higher inflation in these periods was directly responsible for the growing demand for gold.
Higher demand might contribute somewhat to higher gold prices, but there are plenty of other factors that impact the price of gold. However, experts suggest that supply factors and trading trends in futures markets probably have more material impacts on gold prices, not to mention investor sentiment.
Gold’s Historical Track Record as an Inflation Hedge
Lessons about gold’s track record as an investing hedge may be learned by looking back at the 1970s when the U.S. experienced its last period of high inflation.
Oil price shocks and energy shortages drove average annual U.S. inflation up to around 8.8% from 1973 to 1979. During those six years, gold won over many investors as a top inflation hedge, since the yellow metal generated an impressive 35% annual return.
While the 1970s played a big role in giving gold a shining reputation as an inflation hedge, its performance since that time has been lackluster.
From 1980 to 1984, annual inflation averaged 6.5%, but gold prices fell 10% on average each year. Returns not only fell short of the inflation rate, but they also underperformed real estate, commodities, and the S&P 500. Annual inflation averaged about 4.6% from 1988 to 1991, but gold prices fell approximately 7.6% a year on average.
Gold’s Performance as an Inflation Hedge Today
Gold prices today appear to be having a comeback in 2024. And in fact, the price of Godl has increased by 14% from November 2023 through February 2024.
But that leg up followed a relatively weak performance in 2021 and 2022. The consumer price index (CPI), a popular measure of U.S. inflation, gained 4.2% year over year in April 2021, its first annualized gain of more than 4% since 2008. While the average annual U.S. CPI growth was around 6.8% during those years, gold prices eked out an average annual growth rate of only 1% over the same period.
“Gold prices have been trading sideways to down for most of 2021 and 2022 while inflation was at multi-decade highs.
Some studies have found that gold can be an effective inflation hedge, but only over an extremely long time horizon of over a century.
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