What Happens to Gold and Silver During Stagflation?

Understanding Stagflation First

Before looking at how gold and silver behave, let’s first understand the concept of stagflation.

What is Stagflation?

Stagflation is the simultaneous occurrence of high inflation, slow or negative growth, and rising unemployment. Under normal conditions, inflation and unemployment move in opposite directions. This is the Phillips Curve. When the economy runs hot, prices rise. When it cools, inflation eases. Stagflation breaks that relationship entirely.

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These are some of the elements that contribute to the level of uncertainty and volatility in the financial market. High inflation beyond trend, together with low levels of growth and employment, make a difficult set of conditions for the policymakers. If the policymakers increase the interest rate in order to control the inflation, they will exacerbate the economic slowdown.

It is a rare condition. But when it arrives, it changes the way almost every asset class behaves; including precious metals.

The 1970s: The Clearest Historical Example

The 1970s provide a wealth of historical information on stagflation and an excellent case study on the performance of precious metals under stagflation.

Once the United States discontinued the gold standard in 1971, the price of gold was allowed to float freely based on supply and demand in the market. From 1973 to 1979, inflation stayed elevated at an average of almost 9% due to rising oil prices.

In this timeframe, gold experienced a strong rally, increasing from about $100 per ounce in the middle of the decade to almost $650 by early 1980 when inflation peaked.

Meanwhile, silver performed even better, increasing its value from $1.50 per ounce in 1970 to almost $50 by early 1980.

Why Do Gold and Silver Rise During Stagflation?

The mechanism behind gold's performance during stagflation comes down to one concept: real interest rates.

Real interest rates are calculated by subtracting inflation from the nominal interest rate. When inflation runs above bond yields, real rates turn negative. Why earn a negative real return on a government bond when you can hold an asset that has historically preserved purchasing power?

During the 1970s, the Federal Reserve allowed inflation to run well ahead of policy rates for years. Real rates were deeply negative for extended periods. Investors rotating out of dollars and bonds were not being contrarian.

They were responding rationally to a system that was paying them negative real returns, and gold was one of the few places to go.

The same is true whenever the pattern recurs. Higher inflation expectations, along with lower expectations of growth, have always led to higher demand for gold especially among ETF investors and individual investors.

Gold vs Silver: They Do Not Always Move Together

There is one factor which is usually ignored, and that is gold and silver don’t necessarily move in tandem in stagflation.

Silver is heavily reliant on industrial demand. Its uses include electronics, solar energy panels, and manufacturing purposes. When the economy slows down, the industrial demand for silver will decline even when monetary demand increases. There will be two contradicting factors affecting the price of silver. The price of gold will keep moving up due to its safe haven nature, whereas silver’s price will suffer due to declining industrial demand.

During the 1970s, silver outperformed gold in percentage terms because the industrial economy was still functioning through most of the period. In a deeper recession scenario, where industrial output contracts significantly, silver can lag behind gold. The key variable is how severe the economic slowdown becomes alongside the inflation.

The 2025–2026 Rally: History Repeating

The stagflation thesis is no longer just a historical case study. The past two years have seen gold and silver deliver returns that match their strongest historical rallies, similar to periods like the late 1970s inflation crisis, 2008 Global Financial Crisis, and the stimulus-driven surge during the COVID-19 pandemic.

Gold gained around 65% in 2025, its strongest annual performance since 1979. In January 2026, spot gold pierced $5,000 per ounce for the first time in history, peaking at $5,589.38 on January 28. By April 2026, prices had settled around $4,867 per ounce, still up around 80% over the previous 12 months. 

Silver surged 147% in 2025 and hit an all-time high of $121 per ounce in January 2026, with gains of approximately 225% over the past 12 months, significantly outpacing gold on a percentage basis.

Three Forces Drove This Rally Simultaneously

The first was central bank buying. Central banks, which hold around 20% of all mined gold, increased their reserves steadily from 2022 to 2025 to diversify away from the US dollar. Last year, gold overtook US Treasuries as the largest share of global reserves for the first time in 30 years.

The second was falling real interest rates. The 2025 divergence is a clear reminder of gold's macro sensitivity. As real yields trended down from June to December, gold surged toward fresh highs. This inverse relationship remains one of the biggest drivers heading into 2026.

The third was the geopolitical environment. Gold moved above $4,900 an ounce in early 2026, reaching an all-time high of $4,967.48, up around 80% over the past 12 months.

When Does the Rally End?

History provides a definitive answer to this question. When Paul Volcker was appointed to head the Fed in 1979, he implemented tighter monetary policy and permitted interest rates to rise dramatically. Inflation was reduced and the price of gold topped out into a years-long bear market.

Stagflation eventually ends through aggressive policy intervention that restores positive real interest rates. The moment real rates turn meaningfully positive, the opportunity cost of holding gold and silver returns, and the tailwind fades. Recognising that exit condition is as important as identifying the entry.

Conclusion

Over time, gold and silver have proven their worth as stores of purchasing power in times of stagflation, compared to traditional investments. These precious metals are not entirely without risks; they can suffer from dramatic drawdowns even during bullish trends. 

This fundamental principle holds true for each situation encountered: where real interest rates are negative, owning gold and silver becomes increasingly compelling. Once policy makers manage to control the inflation rate and ensure that bonds and cash provide positive real yields, the momentum will cease.