Will Higher Inflation in March Increase Gold Prices too?

Note: Article was posted to GP private investors few months ago.

Inflation has increased during the month of March. As the prices of different items due to inflation rise, the prices of gold should also increase. This is because higher inflation results higher gold prices. The US CPI (consumer price index) faced the largest monthly jump after 2012. It has increased by 0.4% during February. This figure surprisingly increased to 0.6% during the month of March. This increase in the inflation rate is due to the 9.1% increase in the gasoline price during the last 1 year.

The worst situation of inflation is more clearly seen on an annual basis. In the last 1 month, the Consumer Price Index increased by 2.6% till March and 1.7% in the following month. Hence, for the last 1 year, inflation has not increased rapidly but has also crossed the target set by Fed. On top of that, this inflation is not something that will go off quickly. The inflation condition can stay like this for a longer period. This can even further increase in the coming months depending on the price of oil. Next CPI estimation should be done in accordance with the quadrupling of oil prices in 1 year. 

Will higher inflation results higher gold prices?

How is the rising inflation rate going to affect the gold market? Will higher inflation result in higher gold prices? Well, in accordance with the higher inflation, it should. It’s assumed as the inflation hedge (investments that either maintain or increase their value during declining power of money). To support the price of the bright yellow metal, inflation should decrease. It can also at least alleviate the real interest rates.

In view of the current inflation condition, it’s expected that inflation won’t stop here. More accurately, it has just begun its journey. In today’s world, it’s believed that inflation is not a big issue in the modern economy. Therefore, the stagflation that happened in 1970 will not happen again. The Fed believes that in a really problematic situation, it will be able to control inflation. 

New monetary system of the Fed is more resistant to the pressure of increasing prices. The economy has changed. During the last few years, inflation hasn’t increased much as unemployment decreased. During the pandemic, the unemployment rate was 3.5%. This is low for most of the last two years than what was before the deadly pandemic. What’s more interesting is that inflation didn’t change much. So, without raising the interest rate, we can wait for real inflation. The economy has changed, but its laws are the same. 

The belief that stagflation won’t happen again is being underestimated. The confidence in economics is rising with the increasing vaccination. This is also due to speedy economic recovery. This means that the investors should put their focus more on economic growth compared to the focus on inflation. There is a probability that with the end of this pandemic, the economic confidence will decrease. This may be due to higher or persistent inflation, bond yields, or other reasons. When this happens, the gold prices will jump again.