Gold prices are on the brink of setting another record as a confluence of market forces has prompted investors to pile into the precious metal over recent months.
Analysis of historic data suggests that the correlation coefficient between CPI and the price of gold is actually very close to zero over the long run. It is only during certain periods when the two values had a positive correlation, but overall, there is no discerning pattern to establish a long-term link .According to Amy Arnott, a portfolio strategist at Morningstar, gold's correlation to inflation has been relatively low — 0.16 — over the past half century.
Macroeconomic theory states that a higher rate would discourage consumer spending and borrowing, which in turn slows down economic activity and helps keep inflation in check. To fully digest the interplay between gold and real rates, we have to first refer to a century-old economic observation called the Gibson's Paradox, which posits that a positive correlation exists between price levels and interest rates. The reason it was called a"paradox" was because the relationship could not be explained by existing economic theories.
Ben Popatlal, multi-asset strategist at Schroders, acknowledged that it's possible for the price of gold to go up together with real yields, contradicting the conclusion from the firm's September 2022 study which described gold as being in the middle of a"tug of war" between interest rates and inflation.