Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Gold's Inflation Problem

Commodities / Gold and Silver 2012 Mar 10, 2012 - 12:00 PM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleGold goes up with inflation. Except when it goes up regardless...
 
EVERYBODY'S fretting about inflation. Central bankers say there's too little, or will be (just you wait). Lesser mortals feel there's way more than the official numbers let on. And finance professionals think there's a lot more ahead.



"By the time inflation becomes evident," reckons John Paulson of the $14 billion Paulson & Co. hedge funds, "gold will probably have moved, which implies that now is the time to build a position."

"As inflation picks up, the real price of gold goes up," agrees Jeremy Grantham of the $97bn GMO in his latest letter to clients. And the only asset class with a positive correlation to inflation is gold, according to Credit Suisse's latest Global Investment Returns Yearbook.

So far, so bullish if you agree with Paulson, Grantham and pretty much everyone else that inflation is set to start rising. Because judging by the late 20th century – after gold prices were cut free from their $35-per-ounce peg in 1971 – gold goes up with inflation.

Only problem is, gold has already moved – rising six-fold and more in nominal terms despite the quiestest decade for official US inflation since the 1950s.


What to make of it? First, and to repeat yet again, gold is not simply about inflation. It wasn't in the 1970s, nor the 1980s, and it isn't today. Gold is about inflation and interest rates. Because low or negative real returns on "risk free" bonds and cash force cautious savers to turn instead to a rare, indestructible home for their money. Which cash and bonds aren't.



Second, and for the very same reason – that people don't like losing value year after year – long-term bear markets in equities are typically good for gold prices too. Because if risk capital gets no reward, it looks elsewhere, and when risk capital keeps getting whacked, it turns anxious and runs. Treasury bonds appeal. So does gold.



Over the last century and more, and allowing for dividends too, the real return on US equities has typically been negative when gold was up, and positive when gold was down.

This patterns held true even during the fixed-gold price era of the Gold Standard – a period when gold's inflation-fighting power was sapped first at $26 and then at $35 per ounce. On a five-year horizon, the real return from stocks and gold sat on opposite sides of zero in 59% of all months since 1910. They were both up in one-third of those months. Gold and stocks lost real value together less than 7% of the time, most of which came thanks to world-war inflation.

Whether or not war lies ahead again, "The 800-pound gorilla [of inflation] is not in the room yet, but you can hear him thumping his chest up in the hills," says Jeremy Grantham.

"He will come eventually" – and this gorilla eats bondholders for breakfast, of course. He gnawed on their fixed-income bones all through the '70s, when stocks made an equally miserable investment. He'll have a real feast destroying creditors buying bonds today at the lowest yields in history. But where Grantham suggests buying stocks as "an under-rated inflation hedge", the immediate costs could prove dear.

What to do? The obvious conclusion is to buy gold – so obvious, in fact, that there must be something wrong with it. Especially as gold has already moved, way ahead of that inflation in consumer prices which Grantham and the Credit Suisse report look at, as do BullionVault's charts above.

You could argue the inflation data are wrong, or this time is different, or that inflation simply won't show up, despite the best efforts of central bankers worldwide to drive savers out of cash. But what's undeniable about this bull market in gold so far is that bonds have yet to lose their appeal, while stocks have failed to deliver positive returns. So if or when strong inflation does show up, retained wealth will likely find it hard to resist buying gold – no doubt alongside industrial commodities, land and other hard assets – even after the last decade's myth-busting performance.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

T-Blue
12 Mar 12, 21:45
CPI vs Gold

I am guessing the last graph uses the official (manipulated) CPI which is artificially low in the recent decade making real US stocks look higher than they really are because they are adjusted by an incorrect inflation measure. That makes me wonder what a non-fudged graph would really look like. I seems like it would still support your thesis.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules