Gold prices reached new, all-time highs in the months following the pandemic. Many investors believed that inflation would ignite following the aggressive response from the Federal Reserve and the White House.
These investors were correct that inflation would take off, as we now have the most inflation since the early 80s. However, they were incorrect in believing that gold would benefit. Gold declined from it's all-time high of $2,080 between August 2020 and March 2021. From there, prices consolidated before starting to rise in 2022.
Of course, this was unexpected as gold found a bid when the Fed made its pivot towards a more hawkish policy. While interest rates and inflation are the most important factors for gold's price in the long term. In the short-term, gold prices can often fluctuate due to geopolitical factors. Thus, Russia's invasion of Ukraine marked an inflection point for gold. Additionally, the sanctions on Russia and capital controls could also marginally increase demand for gold as people look to move money out of paper currency and into more tangible assets.
So, gold rose by more than 10% from the start of February until last week, when it re-tested its August 2020 high. Since then, gold has backed off and is currently hovering around the $1,900 level. Major exchange-traded funds like SPDR Gold Shares
With this breakout attempt failing, the next question is whether or not gold prices will continue moving higher, or is this the start of a new bear market?
As the past couple of years has shown, gold often behaves counterintuitively. Therefore, investors should consider buying the dip and staying bullish on it even despite expectations that the Fed is going to raise rates.
For one, this is a wager that Russia's invasion of Ukraine is not going to be tidily resolved. Instead, it's bringing in a new era of a dangerous and more multipolar world. Gold prices more than tripled in the decade following 9/11. Another factor is that even though the Fed is getting more hawkish. It's still not raising rates aggressively enough that would cause real rates to move higher.
Instead, real rates have been flat as the Fed is simply hiking to keep pace with inflation rather than front-running it. This is an indication that the Fed still thinks that inflation could come down on its own accord, and it's prioritizing growth over price stability. We see a similar example from 2002 to 2007 when gold prices were rising during a rate hike cycle due to inflation outpacing the hikes.
