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Why is the gold price not shooting up in spite of raging inflation?

The rising rates will make it quite attractive for investors to stay in the currency to earn the higher currency yield.

Gold prices, inflation, hedge, US dollar, interest rates
The strength in the US Dollar and the rising US rates are putting pressure on gold price.

Gold prices are not moving up even as inflation is raging globally. Traditionally, gold is considered to be the best hedge against inflation. However, in the current scenario gold prices seem to be moving in a tight range even though inflation is making waves globally. As per a report by Emkay Wealth Management titled ‘Navigator’, the upside level for gold may be capped at $1930/oz whereas $ 1760 and $ 1730 may act as key support levels for the yellow metal. Currently, the gold price in the international market is trading in the range of US$ 1800-1850. Gold price in India is close to Rs 51000 per ten gram while it was about Rs 46,000 in May 2021.

In the US, inflation is close to 8.5 per cent which is almost at a 40-year high and even in India the inflation numbers are showing an uptick and is close to 7.79 per cent.

What is keeping the gold price in check is the interest rate scenario. In the US, the interest rates have started to move up and the Fed is expected to announce a series of rate hikes after the May 2022 hike of 0.5 per cent. In a rising interest rate scenario, gold is not a preferred investment.

While the surging inflation in the major economies of the world makes it an appropriate choice for some amount of value preservation, the strength in the US Dollar and the rising US rates are putting pressure on gold price.

There is a clear positioning from the Fed that the rate hikes will continue till inflation is tamed. The rising rates will make it quite attractive for investors to stay in the currency to earn the higher currency yield. This has also led to a strengthening US currency. Gold being quoted in US Dollars, the price is bound to come down – states the report.

At some point in the near future when interest rates stabilize and once the inflation is tamed, it remains to be seen how gold prices react. Till then, a sharp up move in gold may not be expected.

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