Researchers conducted an analysis of gold prices since 1971

The financial markets have always been known for their unpredictability, as traders often say, “Better be safe than stupid.” However, recent events have highlighted the complexities of investing. Despite expectations of rising inflation and economic uncertainties, gold, typically considered a safe haven in such times, has shown surprising movements. In the past two years, its price has hardly budged, leaving investors puzzled. While gold has historically served as a hedge against inflation and economic turmoil, it seems that other factors, particularly real interest rates, are now exerting a stronger influence on its value.

In early 2021, with the anticipation of inflation and economic challenges due to central banks’ massive money printing and extraordinary fiscal stimulus, one would expect investors to flock to gold. Traditionally, the precious metal has been a go-to asset for preserving wealth in countries plagued by inflation. However, the reality has been far from expected. Over the past two years, the price of gold has seen minimal movement, increasing by a mere 3% from $1,900 to $1,960 per ounce. The lackluster performance has left investors scratching their heads, as gold’s historical significance, limited supply, and durability seem to have lost their appeal.

Deciphering the true value of gold has always been a challenging task. Advocates of gold point to its historical role as an asset backing wealth, its use in jewelry, its scarcity, and its physical durability as reasons for its value. Nevertheless, unlike stocks and bonds, gold does not generate cash flows or dividends, leading to an absence of yield. This lack of yield has contributed to average returns for the metal in recent years. Real interest rates, which demonstrate the return on safe investments like Treasury bonds, play a crucial role in gold’s price determination. As real yields rise, assets without cash flows become less attractive, thus impacting the appeal of gold. Despite rising concerns about inflation, the remarkable rise in interest rates has overshadowed its influence, keeping long-term expectations relatively stable.

Researchers from the Federal Reserve Bank of Chicago conducted an analysis of gold prices since 1971. They identified three main factors influencing gold prices: its role as a hedge against inflation, a hedge against economic calamity, and a reflection of interest rates. Their findings demonstrated that all three factors have an impact on gold prices. While gold has historically acted as a hedge against inflation and economic downturns, the most significant influence in recent years has been higher real interest rates. The negative effect of rising real interest rates on gold prices has been consistent across different time intervals. The researchers noted that since 2001, considerations of long-term real interest rates and economic growth have played a dominant role in gold’s price movements, with inflation taking a backseat.

Consequently, gold can still serve as an inflation hedge, but it is not the sole determining factor. The metal’s price will rise during inflationary periods if central banks are perceived as ineffective or if real interest rates fall. However, these conditions have not materialized in the current inflationary cycle, explaining gold’s lackluster performance. The recent movements of gold serve as a reminder that even with insights into the future, investing remains a complex endeavor. Ignoring the interplay of various variables can lead to dangerous investment habits, emphasizing the need to carefully consider the causes of market events and to adapt one’s strategies accordingly.