Russell: Gold hasn't responded to inflation in the usual way

Gold has so far failed to rally in the face of the highest U.S. inflation in decades, suggesting that a long-held market orthodoxy may be breaking down.

The price of spot gold ended at $1,786.94 an ounce last Monday, down from a recent high of $1,876.90, reached on Nov. 16.

That peak had more to do with the emergence of the new omicron variant of the coronavirus, which stoked fears about renewed travel and other restrictions hitting the global economy as countries battled the pandemic.

The subsequent easing of those fears has seen gold drop back below $1,800 an ounce, while the mounting worries of a global inflation breakout have had minimal impact on the price.

The consumer price index in the United States rose an annualized 6.8% in November, the largest annual increase since June 1982, as the cost of goods and services jumped amid supply chain constraints.

But the CPI data release on Dec. 10 resulted in virtually no reaction from the spot price of gold, with the precious metal remaining in a fairly tight range during the trading day.

The market view that higher inflation is good for the price of gold is based on its use as an inflation hedge. In other words, gold is an asset that will hold its value better than others as the value of currencies are eroded by price rises.

Spot gold went from $226 an ounce at the end of 1978 to a peak of $666.75 by September 1980 as U.S. CPI surged to hit 14.73% in April 1980.

U.S. inflation then trended down to just over 1% by the end of 1986, while gold spent the next 27 years meandering before it broke above its 1980 peak in mid-2007.

However, gold's extended rally from about 2000 onwards wasn't driven by inflation, or even by interest rates. Rather, it appeared more related to the rise of China and India as the two top consumers of the metal.

For inflation to play a role in boosting gold, it will likely have to be far worse and sustained for an extended period.

This may still happen, but in the meantime, gold will probably have to overcome the likelihood of higher interest rates, which increase the opportunity cost of holding the non-yielding metal.