Will Gold Protect You From Inflation?

New research released this week questions the widely held believe that gold acts as a hedge against inflation.

Co-authored by one of the world’s leading academics on gold markets, the research leads to an interesting conclusion which ‘highlights the monetary nature of gold as a commodity.’

The belief that gold is an inflation hedge is not unfounded. As the authors report in the introduction, recent studies find that this is the case, ‘they all argue that the price of gold and the consumer price index (CPI) series are cointegrated.’

These finding do support the view that gold should provide a foundation for the international monetary system, but not everyone agrees that the link between gold and inflation is so clear. In fact, explain the authors, many of the findings that point to this relationships are based data taken from the 1980s or more specifically, 1982.

With this in mind the authors eliminate data prior to 1985 to show that the long term inflation sensitivity of gold ‘can be forecast by macroeconomic state, variables, namely by interest rates.’

They reject the premise that gold and inflation are cointegrated, this is based on results that show the sensitivity of the gold price to inflation declines in the 1990s.’ But it is important to note that in the 2000s ‘the comovement between these two factors increases significantly again.’ These findings are, I believe, in line with work carried out by the World Gold Council who updated Professor Roy Jastram’s work on gold and inflation and concluded that gold and inflation’s relationship has only become positively correlated in the last decade or so.

As the authors look into this they find that ‘gold’s inflation sensitivity tends to increase during dollar depreciations.’ Further to this, and more interestingly, the research finds that ‘gold’s inflation sensitivity, hence its role as a hedge, can be forecast by interest changes.’

The role the interest rate changes in regard to gold and inflation’s relationship is a key takeaway, the researchers find that ‘both short and long term interest rate changes forecast changes in gold’s inflation beta…[further] the impact is negative and the cumulative impact of interest changes are felt in approximately 6-months.’

These findings are crucial for those in gold investment. I believe they are particularly key during an age where central banks will twist and turn monetary policy any which way to jump-start the economy.

In conclusion, ‘this finding, of course, further illustrates the monetary nature of gold as a precious commodity.’