Gold is a commodity that has been around since the beginning of time. It has always been seen as a stable store of value and an asset class that can provide a hedge against inflation. Currently, the rate of inflation is rising, but Gold doesn't seem to be rising, should we be worried?
You have to understand that prices are relative
The price of gold is not the same as the value of gold. The price is what you pay for a unit of gold, while the value can be determined by how much you can buy with that same unit.
Inflation is a broad term that refers to an increase in prices and/or wages. In many countries, inflation has been increasing over time due to factors such as high unemployment rates and interest rates.
When we talk about inflation, we often think about how it affects our finances. But there are other ways in which inflation affects our lives too - for example when it comes to buying goods and services or investing in businesses.
In many countries, the dollar is gaining ground because its currency is depreciating greatly when compared to the dollar. This means that the price of gold in dollars is increasing as well.
Source
The price of gold in dollars has increased tremendously over the past few years due to several reasons. The first reason is that many countries are printing more money than they should and this causes inflation. Another reason for this increase in prices is that more and more people are investing in gold for its haven properties as well as its history of being a valuable commodity.
If price is relative what does that mean for gold?
The reason behind the rising use of the dollar is that people are holding it instead of their local currency. This has a direct impact on the price of gold and other precious metals.
The United States Dollar is gaining ground because of the depreciation in other countries currencies. With this, people would rather hold the dollar than their local currency and this has a huge impact on the pricing of gold.
The countries that chose to hold the dollar in their bank account are mostly emerging markets. They include Argentina, Brazil, Chile, China, Colombia, India, Indonesia, Peru, etc. The countries that chose to buy gold as an alternative hedge against inflation are mostly developed economies like Canada, Denmark, Switzerland, etc.
The dollar is still a dominant currency despite other commodities like gold becoming more popular among people who need a hedge against inflation. And this is because the countries with emerging markets would choose to hold dollars than put their local currency in their bank accounts. And would not need to buy gold as a hedge against inflation which shows how dependent Gold would still be on the dollar.
I know you think it's absurd.
Yes, being financially educated and knowing the inflation rate of the dollar would make you think those people are making a mistake but it all depends on expectations.
The Fed is expected to be working on monetary policies and inflation is expected to be reduced in the future. This will result in investors’ preferences shifting towards dollar-denominated assets like bonds, treasuries, etc.
So they will choose to invest in dollar-denominated assets like bonds, treasuries, etc because of the increasing yields.
The United States is on the verge of a financial crisis with the Federal Reserve raising interest rates and trying to slow down the economy, and it doesn't seem like they are going to be able to get out of it. But this hasn’t stopped investors from buying more US dollars, despite these challenges, they believe that there will be increasing returns for holding dollars in comparison to their local currency or gold.
This means that even though inflation is high they are expecting increasing returns for holding dollars. Besides, we already know that gold doesn't pay any dividends or interest.
Did I hear you say what about the Hedge?
As I would rightly put it, gold is a good hedge right before inflation however, as we all know, gold is not a good hedge against inflation after it has already happened. Once inflation happens, it's too late to hedge, and the price of gold falls.
So you could say that even with high inflation Gold isn't rising because it's late to hedge against an already existing inflation.