Expert Opinions: Impact of Cooling Inflation on Gold Prices

Inflation has cooled steadily over the past few months, and experts largely agree that the Federal Reserve will cut interest rates at its next meeting.

That’s good for consumers looking to take out a mortgage or swipe a credit card, but what about for investors — specifically those looking to buy gold?

To date, rising inflation has been a boon to the precious metal, sending the average price of gold to record highs several times this year. Will that run-up continue once inflation gets under control, though? 

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Will gold’s price drop as inflation cools? Experts weigh in

Experts say gold’s price will likely continue to increase even as inflation cools — at least for the foreseeable future. Here’s why.

Interest rates and gold tend to move inversely

According to the CMEGroup’s Fed Watch Tool, there’s currently a 100% chance the central bank cuts interest rates at its September meeting. The question is just how far will they cut them?

However low it goes, it should be good for gold. Studies show that interest rates and gold prices tend to have an inverse relationship, so falling rates should only send gold prices up further.

“Lower rates generally translate to a weaker currency, and all of a sudden you have a new form of inflation scare,” James Cordier, CEO and head trader at Alternative Options, told CBS recently. That, in turn, drives more investors to the precious metal and continues pushing up prices. 

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Inflation and rates aren’t the only factor

While inflation and interest rates play a big role in investment activity and overall sentiment, they’re not the only factors to look at when considering gold’s future trajectory. 

“Even with cooling inflation and potential Fed rate cuts on the horizon, I think the core factors driving gold’s appeal — like economic uncertainty, geopolitical tensions, and demand for safe-haven assets — are likely to remain strong,” says David Hollander, founder of Liberty Group, a wealth management firm in California.

There’s also strong gold demand from central banks as currencies weaken globally. This should keep prices rising as well, experts say.

“The convergence of declining interest rates, central banks amassing gold reserves in record fashion, and threats of the dollar’s diminishing role as the world’s primary reserve currency has set the stage for a surge in gold prices,” says Sean Mason, an investment advisor representative with Fresno Financial Advisors. “We could very well be in the midst of the perfect storm, hailing gold as an economic sanctuary.”

More opportunities for growth

There’s also growth to think about. With the Fed poised to cut interest rates, that means yields on other investments like bonds (or even savings accounts and certificates of deposit) are going to fall. At gold’s current highs, the metal is poised to offer better growth as these other products decline.

“The stable yield on gold amidst likely Fed rate cuts could further attract investors, making gold increasingly appealing compared to dollar-denominated assets,” says Keith Weiner, CEO and founder of Monetary Metals.

Gold will also likely be a better choice than other low-risk options like T-bills once rates start to fall. 

“There is an opportunity cost to holding gold. When you buy it, you are giving up whatever Treasury is paying on T-Bills. This is currently well over 5%, but when this falls back to 0%, then there is no disincentive to hold gold, and more investors will do so,” Weiner explains.

The bottom line

While experts largely agree that gold prices aren’t poised to drop anytime soon, there’s always the chance that things can change. And if they do — and it causes the prices to take a dip? Cordier says it should be only temporary.

“With prices currently trading near record highs, there’s always a chance for a pullback,” Cordier says. “However, with bullish fundamental factors as deeply entrenched as they are now, any decline in value will likely be met with new buying.”

If you’re interested in buying gold, there are many ways to do it. You can open a gold IRA, buy physical gold bars and coins, invest in gold stocks and ETFs and more. Talk to an investment professional if you need help deciding the best strategy.