Are Gold and Silver Sending a Warning About Inflation Instead of War?
Gold is supposed to hedge against inflation, stock market volatility, and global conflict. You may have been told this by a friend, a family mentor, or an older investment publication. But, like many things, the truth is messier than any single heuristic or adage can convey. There is truth to holding gold as an investment hedge. It is a permanent, physical asset with a stellar long-term track record.
However, a newly confirmed Federal Reserve chair, constant updates on the war in Iran, an executive branch seeking further rate cuts, and an ongoing battle with inflation have created a macroeconomic environment that is new to everyone. But here is what we do know.
First, a Brief History Lesson
Gold is not a perfect inflation hedge, and we don’t think it should be marketed that way. According to Amy Arnott, portfolio strategist at Morningstar, “there’s no guarantee if there’s a spike in inflation, gold will also generate above-average returns.” Her analysis of historical data found that gold investors lost 10% on average from 1980 to 1984, when the annual inflation rate was about 6.5%. From 1988 to 1991, when inflation averaged 4.6%, gold returned negative 7.6%. Gold’s correlation to inflation over the past half-century has been relatively low at just 0.16, meaning the two don’t move in tandem nearly as often as investors assume.
The exception was the 1970s, when gold returned 35% annually during an inflationary period averaging 8.8%. But that environment, driven by an oil embargo and supply shocks, looked a lot like what we’re seeing now, which is part of why the current moment is worth paying attention to.
Oil and Supply Shocks: The First Domino
Market updates often move faster than the news can keep up with, which is why understanding the sequence matters more than following headlines. Crude above $100 a barrel means trucking costs go up, manufacturing inputs get more expensive, and consumer prices follow, pushing inflation expectations higher and giving the Federal Reserve fewer reasons to cut rates, which makes holding a non-yielding asset like gold more expensive relative to bonds and cash. That cycle can restart with every new development in the Strait of Hormuz.
The war didn’t break gold’s safe-haven case. It routed the damage through energy and inflation first, which changed what investors were reacting to.
Inflation Fears and Monetary Policy Expectations
Gold has shown a counterintuitive relationship with inflation. It’s not as directly correlated to raw inflation numbers as it is to how the Federal Reserve responds to them. When inflation is rising, and the Fed is expected to remain patient, gold tends to benefit because real yields remain low and there’s no penalty for holding an asset that pays nothing. But when inflation pushes the Fed toward holding or hiking rates, gold can get caught in the crossfire rather than acting as a hedge.
Kevin Warsh, confirmed as the 17th Federal Reserve chair on May 13, inherits an institution dealing with five straight years of elevated inflation, which has spiked again due to the war in Iran. He has signaled a hawkish disposition toward fighting it, which means the same inflation data that might otherwise push gold higher could keep working against it as long as rate cuts stay off the table.
Jim Iuorio, CEO of JI Financial Strategies, laid out the distinction in CME Group’s historical analysis of gold across economic cycles: “gold seems to benefit from inflation but less so if the expectations are for the Fed to act decisively against it. Simply put, gold likes inflation but doesn’t like the higher rates or the strengthening U.S. dollar that the Fed may engineer to combat it.”
Metals vs. Headlines: A Shift in Market Priorities
Saxo Bank analysts, as reported by TheStreet, warn that gold and silver are being pulled simultaneously by safe-haven demand, dollar strength, and Iran war developments, which means the metals are responding to several competing signals at once rather than any single narrative. Iain Barnes, CIO at Netwealth, told CNBC that “financial, rather than fundamental investors are the marginal buyers of gold and we see them reducing risk across the board,” which means gold can move with equity markets during broad risk-off episodes rather than against them.
Long-Term Perspective: Metals as Inflation Indicators and Protection
Reuters reported that traders have largely priced out U.S. rate cuts this year, with markets now pricing a 31% chance of a hike by March 2027. In six of the last eight recessions, gold outperformed the S&P 500 by 37% on average, according to CME Group’s historical data, because recessions tend to trigger rate cuts and liquidity injection, which is the environment gold actually benefits from.
The structural drivers behind precious metals ownership remain intact. Central bank diversification is still happening, sovereign debt is still rising, and supply-driven inflation is something the Fed can only partially address. The path to higher prices runs through a Fed pivot, a resolution in Iran, or both, and a long-term position in gold and silver is built to absorb the volatility that comes before either of those happens.
Stay up to date with daily spot prices at CMI Gold & Silver.
2 Responses
I’m surprised that CMI refers to gold as generating “returns.” It does not and never has. I think what Amy Arnott is missing in her analysis is that gold and the M2 denominated in dollars are not correlated. If an investor holds 100 shares of a security, the value of that security is what he can receive from another buyer should he choose to sell it. If an individual holds an ounce of gold (notice, I didn’t say “invests” in an ounce of gold) he will always receive the current number of dollars (or whatever the reserve currency is at the time of sale.)
Gold was $35.00 an ounce when Nixon and his advisors took the U.S. off the gold standard. It is currently at $4100.00 an ounce. The increase in the number of dollars is absolutely not correlated to the value of the ounce of gold. The increase is due solely to the malfeasance of those who are charged with protecting the currency
Gold is a yardstick against which other true risk investments (including the dollar exchange) are valued. Whenever the Fed “prints” money, i.e. adds to the M2 by authorizing banks to loan more or allows our irresponsible “representatives” to increase the National Debt, the (dollar denominated) price of gold goes “up” because gold is scarce and requires “proof of work” to increase supply. In reality, the value of gold does not “go up” the value of gold stays the same. Only the number of dollars required to purchase that gold increases. The value of the metal is the same always.
Since the M2 will always be rising, because that’s what governments and bankers do. The price of gold never inflates. While true that, in a recession, the number of dollars required to purchase that gold may rise, the “value” of gold never changes. Bitcoin is much the same in this respect, but if the electrical grid goes down permanently, Bitcoin truly ceases to exist!
Roslind Capital was engaged in a garden variety Ponzi Scheme, for which, in a just world, their former officers and sales agents will be charged, tried, convicted and sentenced to lengthy prison terms.
Edward — thanks for the thoughtful pushback, and you’re right to call out “returns.” Gold doesn’t earn anything; it just sits there. That word was shorthand for “dollar-denominated price change,” and your framing (yardstick vs. asset) is more precise, so let’s use it.
I’ll say plainly: your first point is one we agree with, and it’s actually the view we hold too. Gold doesn’t generate anything — it’s a measuring stick, not an investment in the traditional sense.
That said, part of why we bring in voices like Arnott, Iuorio, or Barnes isn’t to argue against that premise — it’s because different analysts are watching different parts of the same mechanism, and no single lens captures the whole picture. Arnott is looking at short-to-medium-run price behavior against CPI; Iuorio’s lens is Fed policy and real rates; Barnes is watching flows and risk-off behavior. None of them replace the yardstick framing — they’re describing the turbulence that happens on top of it, which matters if someone’s deciding when or how to hold gold, even if they agree the “value” of the metal itself never moves.
Where I think we actually agree beyond that: gold’s long-run price is a monetary story. $35 to $4,100 since Nixon closed the gold window isn’t gold “performing” — it’s the dollar’s purchasing power shrinking against a fixed, scarce reference point. No argument there.
Where Arnott’s data adds something, even under your own framework: M2 and CPI aren’t the same thing, and they can diverge for years. M2 can keep growing while headline inflation stays tame, or the Fed can push real interest rates high enough that gold’s dollar price stalls or drops even while the money supply keeps climbing — that’s basically what happened under Volcker in the early ’80s, and it’s the same mechanism at play with Warsh now.
So maybe the fairer statement is: gold’s price tracks currency debasement over the long run, and real-rate policy over the medium run — and Arnott’s numbers are really documenting that medium-run noise, not disproving your underlying point. We should have said “price” instead of “returns,” and we’ll be more careful with that going forward. Appreciate you holding us to it.
Johnny Estes