What drives the price of gold: inflation, interest rates, stock market behavior, public sentiment? To investigate, we relate monthly and annual spot gold return to changes in:
- Non-seasonally adjusted Consumer Price Index (CPI).
- Nominal and real short-term (ST) interest rates based on 3-month U.S. Treasury bill yield.
- S&P 500 Index return.
- University of Michigan (UM) Consumer Sentiment.
We start testing in 1975 because: "On March 17, 1968, ...the price of gold on the private market was allowed to fluctuate...[, and] in 1975...the price of gold was left to find its free-market level." We lag CPI measurements by one month to ensure they are known to the market when calculating gold return. Using monthly data from December 1974 (March 1978 for consumer sentiment) through May 2021, we find that:
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