If Gold Is an Inflation Hedge, Why Is the Gold Price Falling?

In recent weeks the gold price has seen some pretty significant price drops. While gold prices are still far higher than they were at this point last year, the falling gold price has understandably made many gold owners and would-be gold buyers a little nervous.

Even more unusual is the number of articles that have spoken of how the gold price is falling due to rising fear of inflation. But isn’t gold supposed to be an inflation hedge?

Shouldn’t fear of higher inflation cause people to buy more gold, and shouldn’t that push the gold price higher?

If gold prices are falling when inflation fears are rising, what does that say about gold as a safe haven asset and inflation hedge?

As we’ll show you soon, higher inflation doesn’t always mean that gold prices will rise, at least not in the short term. But if you’re worried about gold prices continuing to fall due to inflation fears, here’s why all may not be doom and gloom.

Gold’s History Versus Inflation

Gold has a reputation for being an effective inflation hedge, and for good reason. Gold tends to grow in value and maintain its purchasing power over time.

During the 1970s, for instance, the gold price grew at an annualized rate of over 30% per year over the course of the decade, far outpacing inflation that peaked at over 13% in 1979. In fact, since 1971 the gold price has risen nearly 12,000%, while the US dollar has lost 88% of its value since that time.

So if gold has such great performance against the dollar against inflation over long periods of time, why is the gold price falling today?

Gold and Monetary Policy

What many people are looking at when inflation figures are reported today is not how gold will do, but what the Federal Reserve will do.

The Fed has currently paused the rate cuts it began in September 2024, with its last rate cut coming in December 2025. While markets expect the Fed to make at least two more rate cuts this year, rate cuts will be dependent on what kind of data the Fed is seeing.

In order for the Fed to cut rates, the type of data it would want to see includes: lower GDP growth, higher unemployment, and lower inflation.

Lower GDP growth and higher unemployment are self-explanatory, as they would be indicators of a slowing economy, and rate cuts would presumably stimulate economic activity to boost GDP and employment.

Because inflation got out of control in 2022, with the highest inflation rates in 40 years, the Fed is a little gun-shy right now. Fed policymakers don’t want to cut rates too much and push inflation higher.

However, inflation rates are showing signs of increasing again. Recent producer price index (PPI) data showed an 0.7% month to month increase, which equates to an annualized 8.7% inflation rate.

That data came from before the war against Iran, which has pushed oil prices higher and which could result in rising prices throughout the economy as oil and gas prices remain high. So the fact that prices were already rising and now could rise higher is seen as a major reason for the Fed NOT to continue cutting interest rates.

Because lower interest rates are generally seen as being good for gold, we have the paradox that higher inflation, which would normally be good for gold prices, is being seen as bad because this higher inflation might prevent the Fed from cutting interest rates, which is what markets had been expecting and which were thought to be good for gold.

Is it frustrating for gold owners and gold buyers to see economic data that makes the case for gold actually being bad for gold prices in the short term? Yes, there’s no doubt about that.

But as the history of gold prices over the long term has shown, gold has the ability to shrug off short-term price dips and price volatility in order to make significant price growth over the long term.

Why Falling Gold Prices Could Be a Good Thing

If you owned gold when it hit record highs well above $5,000 an ounce, recent price drops may have gotten you down. But that’s alright, these price drops actually may not be all bad.

For one thing, they’re a reminder that gold is an incredibly liquid asset, which is one of its draws. Gold markets are highly liquid and operate around the world nearly 24/7.

When people need liquidity, gold is sometimes one of the first assets they sell, such as recently when fears of the impact of the war against Iran are causing some distress and uncertainty in financial markets.

We saw this during 2008 as well, as liquidity concerns led to a selloff of gold, and the gold price fell 30% during the middle of a recession. Again, this was a paradoxical event, as something that should have pushed the gold price upward (severe recession) actually resulted in a falling gold price.

So if recent declines in the gold price have you worried, just remember that this happened before. And in 2008, gold rebounded from its lows to nearly triple in price by 2011. Could that happen again in the coming years?

Buy Gold Today

If you don’t own gold yet, now is the time to start thinking about buying gold. With prices nearly $1,000 below their all-time highs, gold is far cheaper than it was earlier in the year.

And if the gold price ends up climbing to over $6,000 an ounce this year, as many analysts expect, buying gold today could result in some pretty significant gains.

How many people watched gold break the $2,000 barrier and decide not to buy gold because they thought it was too expensive? How many watched gold break through $3,000 and $4,000 because, again, they thought it was too expensive?

Gold could be going through a tremendous bull run right now, and there’s no telling where the gold price could be next year or in the coming years. Some people even think gold could hit $10,000 an ounce.

Now is the time to jump on the bandwagon. And who better to help you than Goldco?

With over $3 billion in precious metals placements and over 8,000 5-star reviews from our customers, Goldco has helped thousands of Americans benefit from owning gold and precious metals.

Call Goldco today to talk to one of our precious metals specialists and learn more about how you can help safeguard your savings with gold.