Why Gold To Shoulder Impact From Stagflationary Pressures

On Thursday (20 Mar), Gold briefly surged to $3,065 before retreating about $20, this follows the post-Fed decision volatility. While this move might get some bulls back into action, several technical warning signs suggest caution is warranted.

We saw that there is a move to the overbought region with Gold trading above the 12-EMA, but this is what might be seen as a “bull trap”, which is a surge before a potential reversal.

Gold has historically been considered a strong hedge during stagflationary environments, which combine high inflation, stagnant economic growth, and rising unemployment.

The recent price action in precious metals, copper, and related markets deserves careful examination, especially in the context of Thursday’s Federal Reserve decision and broader market dynamics.

Fed Decision: Stagflation Signals Beneath the Surface

The Fed maintained its forecast for two rate cuts this year, initially sparking optimism across markets. If we looked deeper into the details of the forecast, we could see some troubling developments.

1. Inflation expectations were revised upward (to 2.8% from previous 2.5%)

2. Growth forecasts were simultaneously lowered

These combi actually show us that there is stagflationary pressures, this could present a challenging environment for most asset classes.

Fed Chair Powell’s comments suggest that inflation impacts from tariffs will likely be "transitory", that might helped the market to have a small short rally, but the Fed’s actual projections does tell us a different story.

Hence, I feel that the discrepancy between reassuring words and concerning forecasts often lead us to significant market adjustments.

Here is a breakdown of why gold could perform well in such conditions, along with key considerations. Gold's struggle around the psychologically important $3,000 level continues to mirror what we saw in 2011 near the $2,000 mark. The brief push above $3,050 without sustained follow-through suggests potential resistance at these levels.

What makes this particularly interesting is the timing. With uncertainty now declining after the FOMC decision, we're entering that period where markets often show their true colors.

Why Gold Thrives in Stagflation

Inflation Hedge

Gold is a classic store of value when fiat currencies lose purchasing power due to inflation. During stagflation, central banks may struggle to raise interest rates aggressively (to avoid worsening economic stagnation), allowing inflation to persist. This dynamic typically boosts demand for gold.

Example: In the 1970s stagflation era, gold surged ~1,300% as inflation spiked and growth stalled. For investors , we can actually invest in $SPDR Gold Shares(GLD)$ now to help hedge against the inflation.

The GLD have been moving pretty positively when we experienced the market sell-off, but we are seeing Gold starting to slow down its upside, this could be what others call a bull trap, but this reversal might be an opportunities for us to take advantage.

Safe-Haven Demand

Stagflation often coincides with market volatility, weak equity performance, and bond market stress (e.g., rising yields erode bond prices). Investors flock to gold as a "safe asset" when traditional investments underperform.

Example: During the 2007–2008 crisis (pre-QE), gold rose as equities crashed, though deflationary pressures later muted gains.

Real Interest Rates

Gold performs best when real interest rates (nominal rates minus inflation) are negative or low. In stagflation, central banks may keep nominal rates below inflation levels to avoid crushing growth, creating a favorable environment for gold.

Currency Weakness

Stagflation can undermine confidence in fiat currencies (e.g., USD), particularly if fiscal deficits balloon or monetary policy appears ineffective. Gold, as a non-fiat asset, benefits from this loss of faith.

Potential Risks to Gold in Stagflation

Aggressive Monetary Tightening

If central banks prioritize fighting inflation over growth (e.g., sharply hiking rates), real rates could rise, making non-yielding gold less attractive. However, this risks deepening economic stagnation, creating a policy dilemma. There is a possibility of easing of the QT (quantitative tightening), so this might help the market, but what happen if the QT turns aggressive?

Deflationary Shocks

If stagflation transitions into outright deflation (falling prices), gold may lose momentum as cash and bonds regain appeal.

Competition from Alternatives

Cryptocurrencies (e.g., Bitcoin) and commodities like energy or agriculture futures may compete with gold as inflation hedges.

Historical Context

1970s Stagflation: Gold surged from 35/oz(1971)to35/oz(1971)to850/oz (1980) as inflation hit double digits and growth faltered.

Post-2008 Era: Gold rallied as central banks cut rates to near-zero, but gains were muted by deflationary pressures initially.

How to Position Gold in a Stagflation Portfolio

Allocation

Gold typically serves as a 5–10% portfolio hedge to diversify risk. Overweighting may depend on the severity of stagflation signals (e.g., rising CPI + falling GDP).

Complementary Assets

Pair gold with:

TIPS (inflation-linked bonds) for explicit inflation protection.

Energy/Commodities (oil, copper) to hedge supply-driven inflation. $Exxon Mobil(XOM)$

Defensive Stocks (utilities, consumer staples) to balance equity exposure. One of the consumer staples which have been $Walgreens Boots Alliance(WBA)$

I would think WBA could be making an uptrend movement soon, as investors could be moving towards consumer staples stock, as the recent Fed comment seem to suggest inflation would continue going down, with good labour number, this could mean consumer spending might be onto essentials not discretionary.

Monitor Key Indicators

CPI/PPI trends: Rising inflation + slowing growth = stagflation risk.

Unemployment claims: Rising joblessness alongside inflation is a red flag.

Central bank rhetoric: Dovish policies (delayed rate hikes) favor gold.

Summary

Gold is likely to outperform during stagflation due to its dual role as an inflation hedge and safe-haven asset. However, its efficacy depends on:

• The persistence of inflation relative to growth weakness.

• Central banks’ willingness to tolerate inflation over recession.

• Real interest rates staying negative or low.

So as investors, we could accumulate gold gradually (e.g., via ETFs like GLD or physical bullion) if stagflation signals strengthen and then rebalance if growth recovers or inflation subsides.

Appreciate if you could share your thoughts in the comment section whether you think Gold is a good asset to shoulder impact from stagflationary pressures.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.