Gold's Price Puzzle: Inflation Disconnect Sparks Model Reboot

Gold's price movements have been puzzling investors as it has risen despite lower-than-expected inflation. The traditional view is that gold acts as a hedge against inflation, but this relationship has weakened over time. In fact, since the 1970s, the correlation between gold and inflation has fallen each decade.

A model developed by the author to track gold's price movements was accurate for nearly two decades but has since broken down. The new model shows that the US dollar is still a significant influence on gold prices, but real yields have flipped direction, which may be suspect. ETF flows are now a major factor in explaining gold's moves.

The author remains constructive on gold miners and bullion, citing strong earnings growth and low valuations. However, they caution that prices may be stretched in the near term. The Canadian Gold Index is trading at a P/E ratio of 13.6x, which is considered reasonable given projected earnings growth.