Gold - Inflation Hedge?

By: Ian Campbell | Wed, Apr 20, 2011
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A recent article asks (and I think answers) the question "Is Gold Really An Inflation Hedge?" - reading time 3 minutes. The article includes charts comparing the price of physical gold with year/year U.S. inflation, with University of Michigan U.S. inflation expectations, and with the U.S. Federal Reserve Balance Sheet. The article concludes that the evidence shows the gold price increase of the past 11 years (gold breached U.S.$1,500 this morning for the first time, trading at just under U.S.$1,505 as I write this at 7:00 a.m. ET) can't be attributed solely to inflation, and says "It is key to understand that the exposure you obtain from buying/selling gold is not exclusively linked to the inflation rate", and that "the fundamental reason gold has value is that it is an alternative to paper currency, and what makes gold attractive to hold vs. a paper currency is what it yields on a real basis".

My comments:

1. I agree that inflation and prospective inflation forecasts are but one factor reflected in the price of physical gold at any given point in time - and from my perspective is far from the most important factor. Moreover, to adopt only U.S. inflation rates in an analysis is very 'U.S. centric'. While the physical gold price typically is quoted in U.S.$, physical gold is a world commodity, not a U.S. commodity. Accordingly, the more apt inflation comparison would be world inflation, if such a statistic was available;

2. While real yields and prospective real yields also bear on the price of physical gold at a given point in time, I see physical gold being little more or less than a 'safe haven' purchasing power hedge against uncertain prospective economic times. 'Uncertain prospective economic times' at the moment include Sovereign Debt concerns (including those of the U.S.), ongoing societal unrest in the Middle East and other countries, inflation concerns, etc., etc. As I have said many times in these commentaries, viewed in isolation the price of physical gold is not so important to me on any given day. What is important to me is what I have come to believe is the sustainable purchasing power of physical gold in either bad or good world economic times. Again, and this is important, the price of physical gold and physical silver at any point in time is of paramount importance to the value of gold and silver stocks (be they explorers or producers).

Silver is also up again this morning (U.S.$0.84 to U.S.$44.77 as I write this at 7:19 a.m. ET). Is silver going up to fast? You might want to listen to a 4 minute video interview of Jim Rogers talking about gold and silver under the heading Jim Rogers Comments On Triple Digit Silver And Issues Warning: "Parabolic Moves Always Collapse". Rogers is head of Rogers International Commodities Fund. He comments regularly on gold, silver and other monetary and economic matters. He is easy to listen to, easy to understand, and from my point of view brings common sense and objectivity to his commentaries. I suggest you spend 4 minutes with Rogers today by clicking on the link to this interview.

Postscript: I have long said that China will not be happy if the U.S. devalues its currency leaving China 'holding the bag' as it were given China's large U.S.$ holdings. You might also want to read a brief article - reading time 1 minute - titled 'China Urges U.S. to Protect Creditors After S&P Warning'. I see this comment by China as 'tip of the iceberg stuff' if the U.S. pursues any virulent form of U.S. currency debasement - but given the U.S.'s debt and continuously increasing debt position I don't know how the U.S. can get out of its fiat currency dilemma without doing making one or more major policy decisions in the next few months - or until Washington finally 'gets it' that deferment of its debt and annual deficit problems won't solve anything.

 


 

Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Economic Straight Talk

Through the Economic Straight Talk Newsletter Ian R. Campbell shares his perspective on the world economy, the financial markets, and natural resources. A recognized business valuation authority, he founded Toronto based Campbell Valuation Partners (1976), Stock Research Portal (2007) a source of resource companies market data and analytic tools, and Economic Straight Talk (2012). The CICBV* annually funds business valuation research in his name**. Contact him at icampbell@srddi.com.
* Canadian Institute of Chartered Business Valuators
** through The Ian R. Campbell Research Initiative

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