Is Gold an Inflation Hedge?

Gold reached yet another record high yesterday, closing at $1,290.20 an ounce on the Comex division of the New York Mercantile Exchange.

The Federal Reserve recently indicated that it stands prepared to provide greater support to the U.S. economy. The financial markets translated this into additional purchases of US government securities, greater liquidity, a weaker U.S. dollar and the specter of inflation.

Let’s continue to explore gold. Is gold an inflation hedge?

If we consider the 35 year period, 1975-2010, inflation averaged 4.03% according to the Bureau of Labor and Statistics. But this really does not tell the story. If we look above at the price of gold, we see that it was flat or declining for about 20 years. Inflation was hardly non-existent during this period. Do you remember interest rates in the late 70s and early 80s?

The following chart shows the relationship between inflation and the price of gold over the past decade.


We have been in a period of very low inflation. However, gold has experienced a rather noticeable run up. So, at least over the past decade, the notion that gold is a hedge against inflation does not seem to be supported by the data. Particularly in the past decade and currently, gold seems to be acting largely independent of inflation.

Today the concern is rather equally balanced between inflation and deflation. There is little evidence that gold serves as a hedge for either.