ZEAL Speculation and Investment: Gold-Inflation Disconnect

Inflation ticked higher in December, based on the latest government data. Higher inflation tends to be good for hard assets like commodities, particularly gold.

However, even though gold hit new all-time dollar highs last year, it’s been underperforming. Over the past few years, gold has tended to rise when inflation appears to be cooling. Yet it’s dropping when inflation has been moving higher.

What can explain this disconnect? Over the past few years, investor interest in gold has waned since the original pandemic-era stimulus. Demand for gold via ETF holdings, a key sign of trading activity, is lower.

While physical buying remains strong, particularly from global central banks, investors have cooled on the concept.

However, there’s a small possibility that the Fed declares victory in the war against inflation too soon. Should that happen, they may cut rates too quickly. Or a monetary change could lead to a resurgence in inflation.

If that happens, we may see another wave of high inflation. That would be similar to the rising inflation trends of the 1970s.

Under that scenario, gold would be more likely to trend higher. Investors would want to own the metal as a hedge.

Until that scenario emerges, it’s likely that gold will trend lower. If it appears that inflation has truly been knocked back lower, then gold prices may cool further.

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