Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge
|Swings in the US dollar have no long-term impact in the price of gold. Nor is gold an inflation hedge.
Three Points
- December 2004: US Dollar Index 108, Gold $435
- April 2009: US Dollar Index 108, Gold $883
- November 2014: US Dollar Index 108, Gold $1182
Gold vs Trade-Weighted Dollar Index 1973-Present
While gold generally moves opposite the dollar in day-to-day fluctuations, long term impacts are nonexistent.
Here is the chart with the index of gold and the dollar set to the same base year, 1997.
Gold vs Trade-Weighted Dollar Index
Gold vs the CPI
Gold fell from $850 to $250 from 1980 to 2000 with inflation every step of the way.
What happened?
People had faith in the great "Maestro", Alan Greenspan.
But, But, But
But Mish, inflation is understated.
Indeed it is. Central banks are clueless regarding how to measure inflation. Bubbles are a direct consequence of inflation.
Note the implication: Because inflation is higher than reported, gold is even less of an inflation hedge!
One Exception
There is one exception to the rule gold is not an inflation hedge.
The exception is extremely high rates of inflation, especially hyperinflation.
In case of hyperinflation, nearly any storable physical asset is a hedge: cheese, cigarettes, gasoline, etc.
Three Things Gold Isn't
- A function of the US dollar in any meaningful way
- A measure of inflation
- A good hedge against inflation
So What Is It?
Measure of Faith in Central Banks
On a price per ounce basis, gold is primarily a measure of faith in central banks.
If you believe central banks have everything under control, don't buy gold.
But Why Have Faith?
- "Zero Has No Meaning" Says Greenspan: I Disagree, So Does Gold
- 30-Year Long Bond Yield Crashes Through 2% Mark to Record Low 1.98%
- More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
- Inverted Negative Yields in Germany and Negative Rate Mortgages.
- Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid
If you believe monetary madness, negative interest rates, and negative rate mortgages prove central banks do not have things under control, then you know what to do.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.