Some Heartwarming News For Gold Investors

The latest research on the relationship between inflation and gold prices provides a bit of hope for today’s worried gold investors. Contrary to popular belief, the study showed, there’s little correlation between inflation rates and your chances of making money in gold. That should be heartwarming news for gold holders who fear they’ll lose yet more money when the Federal Reserve backs off its inflationary practices later this year. Worries about the end of the Fed’s asset buying program have put gold investors down about 22% in the past year.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

The study, published last week, found no stable relationship between inflation and the price of gold. The researchers at Monash University in Melbourne, the University of North Carolina at Wilmington and Trinity College, Dublin, found long stretches of time when the gold market cared not at all about inflation. Long term, they found no correlation at all if the early 1980s were excluded from the data.

We can illustrate the idea by zooming in on a chart of the core inflation rate and the price of gold between 1985 and 2000. During some times gold prices rose although the inflation rate fell sharply. Gold prices were losing ground with rising inflation in the late 1980s. That’s the opposite of what conventional wisdom says is supposed to happen.

US Core Inflation Rate Chart

US Core Inflation Rate data by YCharts

The years since January 2000 provide an even more dramatic example. Gold marched rather steadily upward despite the general decline of inflation during much of that time.

US Core Inflation Rate Chart

US Core Inflation Rate data by YCharts

The paper’s authors note that there are times when gold prices seem particularly sensitive to inflation rate changes, and they offer some discussion of ways to predict when this will happen. For example, they believe gold becomes more sensitive to inflation when the U.S. dollar depreciates or when interest rates decline.

Real Trade Weighted US Dollar Index: Major Currencies Chart

Real Trade Weighted US Dollar Index: Major Currencies data by YCharts

Assuming the research is correct and the trends in the chart continue, it looks like gold prices won’t be moving on inflation numbers any time soon.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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