According to a study by the World Gold Council (WGC) made with data going back to 1971, gold has returned an average of 15% per year when inflation has been greater than 3%. When inflation has fallen below this level, only slightly more than 6% per year. With these data, it would tend to support the theory that gold can offer a hedge when inflation is at remarkably high levels gold ira company. In this context it means when it is clearly higher than any objective set (implicitly or explicitly) by those responsible for monetary policy.
However, if we take a closer look at the data and take into account not only the year-on-year changes, but also the direction and speed of the fluctuations—in both directions—we can see that while gold appears to offer a reasonable hedge against long-term inflation, its credentials in this regard are not so clear in shorter-term periods.
US CPI to gold ratio
If we look at the price of the US CPI and the price of gold throughout history, we can see a positive correlation between the two in the 1970s and 1980s. During this period, the price of gold and the US CPI tended to advance in parallel in the same direction. This time fork took place just after the gold standard was officially abandoned.
From then on the relationship is no longer so defined. For example, the US CPI doubled its growth rate during the tech bubble, while the price of gold barely budged. The 18% jump seen in the final months of 1999 was probably due more to gold’s “safe haven” reputation in the run-up to “Year 2000” and a potential “Millennium Bug” than to concerns about rising gold of inflation.
The evidence suggests that the interaction between the price of gold and inflation is now smaller. You could say since the early 1990s, and it’s important to understand the cause to determine if it’s a permanent break. To answer this we can look at two of the main drivers of the gold price: fear as a source of returns and the opportunity costs of gold’s competitors.
Fear and competitors
Do you want to delve into these two factors? Do not be left with any doubts since the Gold module: reasons to include it in your portfolios, in which Invesco has collaborated, offers an analysis that will give you all the keys. Sign in if you are already a member of Learning and if you are not yet, do not hesitate, register for free.
With the completion of this module, aimed only at professional investors, you will be able to validate it for an hour and a half of training for recertification of EFPA Spain or 1.5 CPD credit from CFA Society Spain.