Why Persistent Inflation Isn’t Enough to Prevent a Plunge in Gold Prices

For generations, dealing with runaway inflation was as simple as buying gold (GCQ26). When the purchasing power of paper currency erodes, the yellow metal is supposed to act as a store of value which can’t be de-based.

Yet, as persistent inflation continues to drag on the global economy this summer, gold isn’t soaring to new heights. Instead, it is fading away.  

After being bid up in a panic to an all-time peak near $5,600 per ounce earlier this year, spot gold has plunged more than 25%, breaking cleanly below the psychological $4,000 threshold. Silver has followed it straight down the trap door. And as for gold stocks? Well, I’ll show you the sad story below.

For retail investors relying on old macro rules, this collapse feels completely counterintuitive. But if you look at the mechanics of modern interest rates, and the chaotic way the stock market behaves daily, the reason persistent inflation is actively crushing gold becomes crystal clear.

Why Isn’t Gold Rallying Now?

Gold’s failure to hedge current inflation comes down to a fundamental concept: opportunity cost. 

Recall that gold is a non-yielding asset. It pays no dividend, offers no coupon, and generates no cash flow. It only makes you money if someone else agrees to pay a higher price for it tomorrow. Right now, that’s not happening. 

When inflation was paired with near-zero interest rates back in 2020 and 2021, holding gold was a no-brainer because “real yields” (the interest rate you earn minus inflation) were negative. You lost money holding cash in the bank, so gold was a logical hiding spot.

The technical picture is what prompted me to first pick gold out of a busy list of market areas I see going lower from here. Because the charts are what I’m all about. This is still a high-risk situation, simply because that dripping-lower pattern shows absolutely no sign of stopping.

Still, the SPDR Gold Trust (GLD) above looks miles better than the VanEck Gold Miners ETF (GDX), which tracks gold stocks. As we see below, the chart looks similar. But this is where I add a dimension to my analysis. 

Gold stocks are just stocks of companies that mine gold. At times when the metal is surging, gold stocks can’t miss. And when the stock market is moving very well, gold stocks can even outperform gold. A rising tide can lift all boats. 

But when the stock market is under pressure, and gold is sliding as it is now, gold stocks face an ugly double-whammy. 

If you’re worried about the downslide in gold prices, I have a pair of ETFs above, alongside GLD and GDX, which allow traders to take the short side. The Ultrashort Gold -2X ETF (GLL) double shorts gold the metal, and the Direxion Daily Gold Miners Index Bear 2X ETF (DUST) does the same with gold mining stocks. 

More Issues for Gold Prices Ahead 

The escalating conflict in the Middle East and shipping bottlenecks near the Strait of Hormuz drove oil (CLQ26) prices higher. Then there’s the matter of the recent hawkish Federal Reserve response. Instead of letting inflation run wild, central banks — led by Chair Kevin Warsh’s Federal Reserve — have signaled they are prepared to keep monetary policy severely restrictive.

Compounding gold’s inflation problem is the strength of the U.S. dollar ($DXY). Because global inflation is forcing the Fed to stay hawkish while other global economies struggle, global capital has flooded into the dollar. Since gold is priced globally in USD, a surging dollar index makes the metal exponentially more expensive for foreign buyers, choking off physical demand across Europe and Asia.

At the same time, Western institutional capital has been dumping gold paper assets. Gold ETFs have recorded billions in net monthly outflows as funds rotate capital into high-yielding short-term debt and bargain-hunting equity trades.

In a late-cycle economy where persistent inflation triggers tight monetary policy, cash and short-dated paper are king. Or, you can play the short side as noted above. 

Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.