Inflation, gold prices and what to expect next

As inflation cools, it could impact the price of gold, but that's certainly not the only factor that matters in this equation. Getty Images

The latest inflation report, released this week, brings with it some good news for your wallet: Prices aren't rising as fast as they were. The latest numbers show that inflation increased by just 2.3% year-over-year in April, a rate that was better than experts expected and the lowest it's been since early 2021. This means that the Federal Reserve is getting closer to the target rate of 2% inflation. And, when looking at the inflation data on a month-over-month basis, there's even more good news to highlight: Prices only went up by 0.2% from March to April. 

But what's surprising is that while inflation has been cooling down, gold prices have remained hot since the start of the year — breaking numerous records over the last five months and recently surpassing the $3,400 per ounce mark for the first time ever. That, in turn, has been great for gold investors, who have been raking in the returns as gold prices have climbed. With inflation continuing to cool, though, there could be ripple effects that have a widespread impact on the economy, including the gold market. 

After all, gold is typically seen as a hedge against inflation, so a decrease in inflationary pressures would generally lead to a dip in gold prices. However, that relationship isn't always straightforward, especially when other economic factors come into play. So what can we expect from gold prices now that inflation has dipped again? Here's what could happen with gold prices moving forward.

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Inflation, gold prices and what to expect next

Gold and inflation have always had a complicated relationship. On the surface, they move in opposite directions: When inflation rises and erodes the value of paper currency, investors often flock to gold as a store of value. But when inflation cools, as it has recently, that can potentially sap some of gold's momentum.

That's because lower inflation tends to reduce the urgency for inflation hedges like gold. When everyday goods and services aren't getting more expensive as quickly, people aren't as motivated to park their money in precious metals. And if inflation is truly under control, the Federal Reserve may start cutting interest rates. This could make other types of investments, like stocks and bonds, more appealing compared to gold, which doesn't yield any income.

But here's the catch: While inflation has been easing recently, gold prices have stayed relatively strong. So why is that happening? It's happening because inflation isn't the only factor that matters in terms of gold pricing. Several other forces are currently shaping the gold market, like:

Geopolitical tensions 

The world remains on edge due to ongoing global conflicts, and in uncertain times, gold becomes a safe-haven asset. Investors may not be as worried about inflation today, but they are worried about global stability, which has helped to drive up the demand for gold — and therefore the price.

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Central bank demand 

In recent years, central banks across the globe have ramped up their gold purchases. This institutional demand has created a strong floor for gold prices and is helping to keep them elevated, even when consumer inflation eases.

Interest rates 

If inflation continues to cool and economic data justifies it, a Fed rate cut could come later this year. That's good news for gold. Lower interest rates weaken the dollar and reduce the opportunity cost of holding gold (since you're not missing out on higher bond yields). In anticipation of this, some investors may already be positioning themselves by increasing their gold exposure.

Recession fears 

While the labor market has remained relatively stable and inflation has cooled, consumer debt is at an all-time high and there are other economic hurdles on the horizon. So, the risk of a recession remains on the table, and if it happens, gold could get another boost, as recessions often drive a flight to safety, and gold is one of the first places investors turn.

Currency volatility 

A strong dollar usually puts downward pressure on gold prices since gold becomes more expensive for international buyers. But should the Fed start cutting rates or global demand for the dollar weaken, gold could benefit from a corresponding dip in dollar strength.

So, while it's impossible to accurately predict where gold's price will land, it appears likely that gold is poised for continued growth overall this year. Many analysts suggest that gold prices could reach between $3,500 and $3,800 or higher by year-end if current conditions persist. However, gold's path won't necessarily be straight upward. 

The gold market is not immune to short-term price volatility, after all, and the price of gold may dip as investors take profits or shift strategies, especially if economic conditions evolve. That said, any dips could present buying opportunities for investors with a longer-term outlook who believe in gold's fundamental strengths in this uncertain economic landscape.

The bottom line

While inflation has shown signs of cooling, the broader economic environment remains complex and uncertain. Gold continues to be influenced by a range of factors, including geopolitical tensions, central bank policies and investor sentiment. For investors considering gold, it's crucial to look beyond inflation figures and assess the broader economic landscape. By staying informed and aligning investments with their financial goals, investors can make more strategic decisions in navigating the current market environment.

Angelica Leicht

Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.