According to JM Financial, a sustained uptrend in gold would be suggestive of financial markets readying for a fresh round of inflation. Gold has served as a forward-looking barometer of macroeconomic stress historically. So, this price action may be a precursor of what will only be officially confirmed months later with the release of inflation data.
Hitesh Suvarna of JM Financial adds that there is a compelling relationship, following a notable pattern. When plotting YoY moves in gold along with the average inflation for the US and Europe, the correlation since 2014 is a strong 0.64.
Thus, gold often reflects inflation, often before consumer price indices, since they are always lagging indicators.
Even in turbulent pricing environments, such as after the Global Financial Crisis, gold prices successfully priced both inflationary spurts and deflationary environments.
According to Suvarna, the current rally may represent another such early signal: a potential rise in global inflation over the next two years.