Back in year 2016, global mayhem ensues as an uncommon idea started to make its way into mainstream news, the idea that inflation is actually a bad thing for the gold is slowly gaining traction.
According to Jim Rickards in September of the same year, the logic behind this trending news is simply the relation of the rate of inflation and the Fed’s decision to increase interest rates depending on the inflation.
As stated by some people, the gold doesn’t have yield, thus steeper interest rates will provide investors some yield. This will give investors the chance to to sell gold and buy Treasury notes for yield causing the gold prices to go down.
After the election of Trump as the forty fifth president of the United States of America, the notion of inflation is bad for the gold is starting to make an impact, with Trump’s extravagant promises which includes the $1 trillion public works program.
According to The Week, the fiscal stimulus could only push the inflation in to overdrive, this activity might weigh on the non yielding gold. The Week also added that the gold struggles when interest rates are climbing.
Jim Rickards was straight to the point when he told that this logic was painfully wrong in so many ways. According to him, almost everything was out of place with the idea that inflation could be bad for the gold.
The Federal Reserve aims to control the inflation, however, the real goal of the organization are negative real rates wherein the inflation is higher that the nominal rates.
The most successful connection happens with gold and strong inflation hikes. Little to average increases in inflation or diminishing inflation does not have a material impact on gold prices in either direction.
The Federal Reserve will gain nothing by increasing interest rates without the fast inflation rate. And yet, this is exactly the time when the gold is successful in maintaining its wealth. Take scenario in the 1970’s for example, when the United States was on the verge of hyperinflation.
The ten year yield Treasury note fell a smidge under 7 percent while the price of gold was at $135 in the year 1977. And for the next three straight years, the gold continued on its path to higher prices. As the calendar hit the year 1980, the gold was trading at a peak of $850 in January while the ten year Treasury yield was at 11 percent.
Volcker ended the 70s inflation by means of pushing interest rates higher than the inflation rate. With the likelihood of a free spending Trump administration setting off inflation, the Fed can increase interest rates and still maintain them under the rate of inflation, these are the negative real rates Rickards was talking about.
To simply sum up everything, the yellow metal may act as an inflation hedge in certain conditions only, such as high inflation which commonly comes with concerns about the current situation of the greenback and the international monetary system.