The Unstable Gold-Stock Relationship

Gold Inflation

Relationship:

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1. Conventional wisdom suggests that there is a

strong correlation between gold and inflation

2. When inflation goes up, gold follows suit. Likewise, a drop in inflation would lead to a fall in

the gold price 3. This is because in times of high

inflation, gold becomes a better option for investors

4. But this is wrong

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1. Let’s look at three charts 2. They track the gold price in US$ per ounce and the monthly

US Consumer Price Index, which is a gauge for inflation

3. The first chart goes from 1974 until 1980 which was a bull

market for gold4. The second chart shows the 21-

year bear market from 1980 to 2001

5. On the last chart, the current bull market is seen, which

stated in 2001

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1. Fact 1: Bull Market2. 1974 until January 1980, gold

went up from US$ 129 (monthly averages) to US$ 675 per ounce

at the end of the period3. This is an increase of 353%4. During the same time, the

consumer price index, a measure of inflation increased

by 67%5. Here, gold strongly outpaces

the inflation development

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• Fact 2: Bear Market• Between 1980 and April 2001,

gold went down from US$ 675 to US$ 260 per ounce, which is

a decrease of 67%• In contrast, the consumer price

index increased during the same period by around 126%

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1. Fact 3: Bull Market2. From 2001 to February 2011,

the gold rate experienced huge gains of 527 per cent

3. The overall inflation rate was only 25 per cent

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1. Especially remarkable is the inflation decrease in the middle

of 20082. If the theory of a positive correlation held true, the gold

price would also go down3. But the opposite was the case:

inflation went down, and gold went up

4. This rather points to an inverse correlation between gold and

inflation

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All of this points towards a weak or even non-existing

relationship between the gold price and the inflation rate

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What do others say about a possible correlation?

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1. First, the Wall Street Journal commissioned a study from the

research firm Ibbotson Associates

2. According to their research, between 1978 and 2010 gold and the inflation rate have a

correlation value of 0.083. This is nearly no correlation (on

a scale ranging from -1 to 1, where 1 is perfect correlation,

and -1 perfect negative correlation, and zero is the absence of a relationship)

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1. Second, also Citibank comes in 2009 to the conclusion that

“there is no obvious relationship between the gold

price and inflation”2. Sometimes the development of

gold follows inflation, at other times there is an inverse trend or just on obvious pattern at all

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Therefore, it can be concluded that there is no, or only a weak, relationship between the gold

rate and inflation levels

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