The World Gold Council believes that the risk of a second round of inflation, similar to that of the 1970s, cannot be completely ruled out, but "re-emerging inflation" does not equate to an "automatic surge in gold prices."
Historical regression shows that gold is not sensitive to CPI changes when inflation is moderate; only when inflation exceeds 4% is the market more likely to interpret it as a policy mistake, and the impact of inflation on gold becomes significantly stronger. However, the ultimate direction still depends on three variables: whether real interest rates decline; whether the dollar weakens; and whether the risk of economic recession increases.
Today's Federal Reserve is more likely to tighten monetary policy rapidly than it was in the 1970s, and the US household savings rate is already near historical lows. Therefore, a new round of inflation may first bring tighter policies, higher yields, and slower growth, which could put pressure on gold in the short term.
The truly favorable combination is rising inflation coupled with declining real interest rates, a weakening dollar, or an increased risk of recession.
