Gold is supposed to rise when inflation goes up. However, that is not what is happening right now. Even as oil prices surge and inflation fears return, gold is heading for a weekly loss. At the same time, global markets are becoming more cautious, and central banks are holding back on rate cuts. As a result, the usual relationship between gold and inflation is starting to break down.
Breakdown:
The immediate trigger is the rise in oil prices. Brent crude has moved above $110 per barrel following disruptions linked to the Iran conflict and the Strait of Hormuz. This has pushed inflation higher, especially in the United States, where March data showed the biggest increase in nearly three years.
Normally, gold benefits from inflation because it is seen as a hedge. However, this time the impact is indirect. Rising inflation is forcing central banks to keep interest rates higher for longer. The U.S. Federal Reserve, along with the European Central Bank and the Bank of England, has already signalled caution. As expectations of rate cuts fade, the appeal of gold weakens.
This is because gold does not generate income. When interest rates are high, investors prefer assets that offer returns, such as bonds. As a result, money starts moving away from gold, even if inflation is rising. This dynamic is now dominating the market, pushing gold prices down by around 2.4 percent for the week and bringing them close to a one-month low.
At the same time, trading volumes are lower due to holidays in major markets like India and China, which has reduced buying activity. In India, there is another factor at play. Gold imports have dropped sharply to near 30-year lows due to a sudden tax demand on banks. This has disrupted supply chains and slowed demand, even during a key buying period like Akshaya Tritiya.
However, there is a contrasting trend at the institutional level. The Reserve Bank of India has been increasing the share of gold in its forex reserves, which now stands at around 16.7 percent. This reflects a broader global pattern, where central banks continue to accumulate gold as a long-term hedge, even as short-term prices fluctuate.
Why this matters:
This shows that gold is no longer reacting to inflation alone. Instead, it is responding to the combination of inflation and interest rates. As a result, the market is becoming more complex, where traditional assumptions may not always hold. For investors, this means that timing and context are becoming more important than simple rules.
The Big Picture:
More broadly, this reflects a shift in global financial behaviour. Central banks are prioritising inflation control over growth, which keeps interest rates elevated. At the same time, geopolitical tensions are driving commodity prices higher. This creates a mixed environment where safe-haven assets like gold do not always behave predictably.
The Crunch:
Gold usually rises when inflation does. This time, it is falling because interest rates matter more. The market is not just reacting to fear. It is reacting to policy.
