What gold is telling us about inflation
Gold continues to glitter. Spot gold prices hit new all-time highs of $2,365 an ounce on Tuesday. They have risen 15% since the start of the year. The rally reflects investors’ scepticism that central banks such as the US Federal Reserve are doing enough to combat persistent inflation, says Peter Schiff of Euro Pacific. “The Fed claims that inflation is headed down to 2%… gold indicates it’s headed in the other direction. The market is a far more reliable indicator than the Fed,” he says on X. “If the Fed really was data dependent, the rising gold price would cause it to raise interest rates.”
“Commodity and bond markets are starting to price in a rate of inflation that is higher for longer, a message that in no way fits with the equity markets’ preferred narrative of a cooling in inflation,” agrees Russ Mould of AJ Bell. Other factors are also helping the yellow metal, says Indrabati Lahiri for Euronews. Demand from Asian shoppers buying jewellery remains robust. Last year the Chinese central bank “reportedly bought about 225 tons of gold, taking its total reserves up to 2,235 tons”, part of a broader trend of central banks seeking hedges against the US dollar.
UBS analysts report that central-bank gold purchases have reached the highest levels since the 1960s at more than 1,000 tons in each of the past two years, says Aaron Back in The Wall Street Journal. Gold tends to outperform in periods such as the 1970s and the 2000s, when fears of excessively loose monetary policy come to the fore. With global conflicts raging and the US heading for “one of the most contentious presidential elections” in its history, the rally could also reflect diminishing confidence in society and political institutions. As James Grant of Grant’s Interest Rate Observer puts it, “Gold’s prime virtue is that it’s nobody’s liability. It holds no national passport and has no politics”.