There are still two days left until the last policy meeting of the Federal Reserve this year, and CPI data that may affect subsequent monetary policy is also about to be released. Gold, which had surged earlier this month due to geopolitical factors, has recently accelerated its price decline.

Investors are closely monitoring data performance and the Federal Reserve's response on Thursday. The US dollar index rose 0.2%, while the benchmark 10-year US Treasury yield also rose. Spot gold fell more than 1% to $1980.73 per ounce, reaching its lowest point since November 21st.

Jim Wyckoff, Senior Analyst at Kitco Metals, stated:

"The recent chart trend of gold has deteriorated. If CPI data rises beyond expectations, it may bring some selling pressure to gold."

Last Friday's non-farm report showed that US employment growth accelerated in November, indicating that the labor market is still struggling to cool down.

ActivTrades Senior Analyst Ricardo Evangelista pointed out:

"The resilience of the US labor market means that there is little possibility of early interest rate cuts... The prospect of long-term interest rate hikes is reappearing, and this development trend supports US bond yields and the US dollar, which is bad news for gold."

Serious derailment between gold and CPI

Campbell Harvey, a finance professor at Duke University, and Claude Erb, a former commodity portfolio manager at TCW Group, have pointed out in a study that the purchasing power of gold is very stable, so its actual price remains unchanged for the long term. When the actual price of gold (adjusted for inflation) soars in a relatively short period of time, it is likely to eventually fall back. Similarly, when the actual price of gold drops significantly, it will eventually rebound.

According to the model developed by Harvey and Claude, the average ratio of gold price to CPI has a significant impact on the actual price of gold. When the ratio is far below the average, gold is undervalued and the actual price is expected to rise. When the ratio is much higher than the average, as it is today, gold is overvalued and the actual price will also fall.

Erb stated in a media interview that since 1975, the average ratio of gold prices to CPI has been 3.9 to 1. This ratio is much lower than the current 6.5 to 1 ratio. If the gold price returns to the historical average of the gold CPI ratio, the price of spot gold should be $1190 per ounce, instead of the current around $2000.

In the past few decades, the ratio of gold to CPI has experienced significant deviations in the early 1980s, late 2011, 2020, and 2021.

During the period of 2012-2015, the actual price of gold fell almost halved.

Therefore, we are currently in an era where gold is overvalued, and in the coming years, gold prices may face similar declines.