How will gold price react if inflation hits 2%?

Inflation has been a significant factor for the price of gold, with the Federal Reserve raising interest rates to combat it and keeping rates higher for longer for the same purpose. Gold prices have been strong, reaching a record high of over $2,400 in May, and have since fallen slightly but still reached over 20% in the past year. At the time of writing, spot gold is trading at $2355.25 per ounce, down 1.52% on the day. Gold futures are trading at 2364.4, down 1.39%.

However, inflation is only one of several factors that can shape the price of gold, and even if it falls, gold could still rise in value for other reasons.

High interest rates used to tame inflation can temper the price of gold, as they offer investors an attractive option for risk-free returns. Some believe that gold prices could fall as inflation drops to 2%, potentially deterring demand and potentially lowering the price. However, it is important to note that the Fed’s reported inflation only measures year-over-year, and the cumulative compound impact of inflation continues to be evident at grocery stores, reflecting the price increase of gold.

Other factors that could influence gold prices include broader economic and geopolitical factors, such as government deficits and the volatility of the market. Gold’s no-default risk, historical positioning, liquid nature, and performance during times of crisis attributes are also attracting new strategic investors interested in ownership rather than exposure.

While inflation may seem to move gold prices, many other factors are also involved. If the US reaches the Fed’s 2% target, it does not necessarily mean that gold prices will move up or down, as other factors such as government deficits and political instability around the world could influence gold investors looking to diversify.