Gold is currently trading at near $1,068, representing its lowest level since 2009. What exactly is determining the direction of gold prices right now?
Investors use two widely known adages to explain the movements of the valuable yellow metal. The first is that gold acts as an inflation hedge. Because gold is not an interest-bearing asset, and is generally priced in U.S. dollars, investors claim that buying gold during times of inflation is an appropriate hedge.
Meanwhile, there is another school of thought that claims gold is an appropriate hedge against financial market volatility. When investors become fearful of declining assets that are perceived as riskier, a flight to safety occurs, driving the price of gold higher. The assets listed in the chart below are U.S. inflation, SPDR Gold Shares (GLD) , and SPDR S&P 500 (SPY) .
In the current trading environment, financial markets are experiencing increased volatility, but have yet to begin a trend lower. Conversely, inflation remains muted across the world as the global economy is depressingly weak. This has sparked debate whether gold will rally higher in coming months if equity markets collapse, or whether low inflation will keep the metal suppressed.
The solution is rooted in a regression study, looking at the stock market, U.S. inflation, and the price of gold since the year 2000. Using the annual percentage change of each factor, it looks as if both schools of thought ring true to differing degrees.