Inflation is on the rise, so why isn't the gold price?

Many ASX investors might be disappointed with the performance of ASX gold shares in recent months. Take the ASX's largest gold miner, Newcrest Mining Ltd (ASX: NCM).

Newcrest shares are today going for $18.95 each, up a healthy 1.77%. However, that still leaves the Newrest share price down 11.82% over just the past month alone. As well as by a painful 22.6% year to date in 2022 so far.

As a gold miner, the Newcrest share price largely rises and falls on the back of the gold price itself. After all, any mining company is only as valuable as the commodities it digs out of the ground. And over 2022 thus far, we have seen gold sink from around US$1,832 an ounce at the start of the year to the US$1,758 or so it is asking today.

So that explains the rough road the Newcrest share price has been on this year so far.

But wait, hasn't inflation spiked this year, not just here in Australia, but around the world? And isn't gold the traditional 'inflation hedge' that outperforms other assets in times of rising prices?

Well, yes and yes. We found out just this week that Australian inflation is running at an annualised rate of 6.1%. And gold has always been held up as an effective protection against inflation, thanks to its static supply and inability to be 'printed'.

Why has gold fallen in the face of rising inflation?

So why then has gold had such a shocker of a year? Well, it might be too simplistic to just declare gold as an inflation hedge, destined to rise in lockstep alongside inflation.

A recent article from CNBC explains this well, laying the blame on aggressive interest rate hikes. The article stated that "rising U.S. interest rates reduce the appeal of non-yielding gold, even though it is considered a hedge against inflation".

This makes sense. Another way to protect one's wealth against inflation is securing yield on one's capital. This yield can come in the form of dividends from shares, interest from loans and bonds, or rent from assets. Gold bullion provides none of these income streams.

So even though gold is viewed as an effective inflation hedge, it still gives off no yield, which can make it unattractive to hold, in an environment of sharply rising interest rates, at least in the short term.

So this is what could be holding the gold price back in 2022 so far. And ASX gold shares like Newcrest, by extension. As such, it will be interesting to see what the rest of 2022 holds in store for the gold price and ASX gold shares.