Gold Prices & Inflation: Understanding the Relationship

Gold prices have normally been strongly correlated to the rate of inflation. It has been thought that as inflation climbs and the dollar became weaker that gold would increase in value. However, gold prices have been also known to do well during times of deflation. In fact, the best gold bull cycles have been during deflationary periods.

As the dollar becomes weaker demand for gold goes up and the gold price, denominated in dollars, will naturally rise. This is due to the flight to quality. Inflation eats away at the stock and bond markets because the value of the dollar becomes diluted, that's why the precious metals, theoretically, should do well during these periods. Gold is the flagship precious metal out of all the precious metals. Silver has shown similar cycles, however, gold prices have performed much better with more volatility than silver over recent history.

With that said, it should be known that inflation is not a requirement for increasing gold prices. In general, times of economic hardship and geopolitical instability also favor high performance from the precious metal. In recent history, deflationary periods have been favorable for precious metals as well.