Over past quarters, Central banks have started to withdraw liquidity from the market and, consequently, not only have equity markets corrected (because of lower growth opportunities), but gold’s performance has also been relatively weak. Though, one would have expected that the price of gold to benefit from the global economic and geopolitical instability.
In absolute terms, the price of gold has not acted as a hedge against inflation but was rather losing out from the impact of rising rates. The short answer is that there is a negative correlation between interest rates and the price of gold. That correlation, while relatively weak at present, still holds.
On the back of weak to stagnant growth and stubborn high inflation, which is resulting in stagflation, one could thus expect that the price of gold should be set to perform.
Nevertheless, stagflation is a rather highly rare event; throughout the modern observation of economic cycles, stagflation has been observed only once, and one should therefore be careful with projecting the same unique pattern into the future.
