Inflation has been elevated. The Consumer Price Index was up 8.5 percent in July versus a year ago, slightly lower than the 9.1 percent year-over-year reading in June. And despite a recent U.S. stock market rally, the S&P 500 Index remains down 10 percent year to date. And gold’s theoretical nemesis, bitcoin—which some experts dub as “digital gold”—is down almost 50 percent on the year.

All of this suggests a perfect backdrop for gold to outperform, right? Wrong.

While gold hasn’t been the worst performing asset class, it has nonetheless languished. The price of gold has fallen by more than 3 percent since Jan. 1. The NYSE Arca Gold Miners Index is also down more than 16 percent on the year.

There are a few reasons for this, despite the seemingly ripe conditions.

First, gold is priced in U.S. dollars. So the stronger the dollar, the fewer dollars it takes to purchase an ounce of gold. That’s a mathematical and mechanical truism.

While U.S. inflation has been running hot, the Federal Reserve has been diligent in raising benchmark interest rates. And more importantly, investors still expect further interest rate hikes in the future. While many economists believe the Fed has been behind the curve in “normalizing” interest rates, on a relative basis it has acted quicker in raising rates than other national central banks.

High relative interest rates versus other nations have attracted foreign investment flows into the United States and strengthened the U.S. dollar. Year to date, the dollar has risen more than 11 percent against the euro and more than 16 percent against the yen.

This dollar strength has effectively capped the performance of gold.

The other deterrent is interest rates. The Fed’s rate hikes have also sunk bond prices. This means the yield on various types of fixed-income instruments, such as government, corporate, municipal, and consumer debt, are rising as their prices go down. Such a dynamic makes bonds an increasingly attractive investment.

A high interest rate is perhaps the biggest factor working against gold. Gold, as a commodity, does not pay a coupon. So higher yields on bonds are an argument against investing in gold.

Since hitting an all time high of around $2,100 per ounce in 2020, gold has been steadily declining.

So is gold’s appeal as an inflation hedge and haven asset class over?

It depends on which side of the fence you sit on regarding the outlook of the U.S. economy.

The argument against gold lies in the belief that the central bank can control inflation by increasing interest rates and managing a “soft landing” of the U.S. economy and avoiding a deep recession.

That’s effectively the thesis from Capital Economics, which forecast a year-end price of $1,650 for gold. That’s not a huge decline from today’s price, but the modest decline would be driven by further strengthening of the dollar and the 10-year Treasury bond yield settling in the 3 percent range.

So far, that’s the path the Fed hopes the nation’s economy is on. Minutes from the August meeting showed that policymakers were intent on increasing interest rates and tightening monetary policy to a level that could restrict economic growth. Though that’s always been the plan, there is a fine line between restricting growth and causing a deep contraction.

But if you believe the U.S. economy is doomed and the central bank will be pressured to lower rates to stimulate growth, then gold prices will likely outperform.

Such an argument was made by economist Nouriel Roubini—aptly nicknamed “Dr. Doom”—in a recent interview with Bloomberg TV.

Roubini sees two options for the U.S. economy. One is the Fed aggressively increasing interest rates to the 4–5.0 percent range, at the detriment of the economy. The other option is sustained high inflation of above 8 percent with relatively lower interest rates because the Fed would have no choice but to stop raising rates or even lower rates owing to the poor economy.

Investment bank Goldman Sachs & Co.’s chief economist Jan Hatzius also believes the United States find it hard to avoid a deep recession.

Relatively high inflation and relatively moderate interest rates. That is an environment ripe for gold prices to outperform.

Article cross-posted from our premium news partners at The Epoch Times.