In spite of soaring inflation, the price of gold has barely budged for two years. What is going on?
Say you knew, at the start of 2021, that inflation was going to soar, the consequence of rampant money-printing by central banks and extravagant fiscal stimulus. In addition, perhaps you also knew that inflation would then be stoked by trench warfare in Europe. With such knowledge, there is perhaps one asset above all others that you would have dumped your life savings into: the precious metal that adorns the necks and wrists of the wealthy in countries where inflation is a perennial problem.
What is going on? Working out the right price for gold is a difficult task. Gold bugs point to the metal’s historical role as the asset backing money, its use in fine jewellery, its finite supply and its physical durability as reasons to explain why it holds value. After all, at first glance the phenomenon is a strange one: in contrast to stocks and bonds, gold generates no cash flows or dividends.
In 2021 researchers at the Federal Reserve Bank of Chicago analysed the main factors behind gold prices since 1971, when America came off the gold standard, a system under which dollars could be converted into gold at a fixed price. They identified three categories: gold as protection against inflation, gold as a hedge against economic catastrophe and gold as a reflection of interest rates.
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