Inflation comes when the price people pay for goods and services increases, and it affects the purchasing power of money. In simple words, when inflation increases, the value of fiat decreases. What about commodities? How does gold in inflation ties behave?
There are many different reasons for inflation, but the most important cause is an increase in a country’s money supply. When the government prints more money or starts a quantitative easing program, the money supply increases, which affects the general level of prices.
The price quite often grows, but inflation doesn’t drive the gold price itself. Here’s how gold in inflation times performs:
Uncertainty is one of the factors that can influence gold in inflation times. As the stock market aims for certainty, it usually stagnates gold prices. Absence of knowledge of who’ll be the 45th president in the USA, how Brexit will turn out for the UK and the whole of Europe, and if terrorist threats are real in the Mideast are the factors contributing to the increase of world uncertainty. Thus, to gold prices growth. Recently, gold prices have gone up as recession fears increased.
You are likely to hear that many investors consider gold as a hedge against inflation. Thus, they decide to buy gold and protect their wealth against value exhaustion, which comes from an increase in fiat prices. In many ways, people can regard gold as an alternative currency; after all, it was the first money. For example, when the residents of Zimbabwe and Venezuela lost faith in their own currency, they turned to an alternative one that was more likely to hold its value. In most cases, it is the US dollar, the Euro, or gold.
Another factor to consider is the fact that gold and the dollar have an inverse relationship (negatively correlated). Since gold is dollar-denominated, any weakness in the dollar pushes up gold prices and vice versa. So, when the USD value strengthens, gold bought with foreign currencies becomes more expensive. It can reduce the amount of gold purchased internationally. Thus, lower demand will put downward pressure on gold prices.