Click to enlarge:



Kudos to Bloomberg’s Dave Wilson for spotting this study last week by Duke University Professor Campbell R. Harvey and his collaborator, Claude B. Erb. They discovered that “Gold’s prospects are less dependent on inflation than on demand from emerging markets.”

As the chart above shows,

“The relationship between gold and the U.S. consumer price index [was set in 1975] when futures on the metal began trading. The inflation gauge was set equal to the gold price as the period began.

Assuming that gold moved in lockstep with the CPI, the implied price would be about $780 an ounce, according to . Yesterday’s price on the Comex in New York, $1,596.80 an ounce, was more than twice that number.

“If gold is an inflation hedge, then on average its real return should be zero,” Erb and Harvey wrote. Instead, returns from 2000 through March of this year averaged 13 percent a year on an inflation-adjusted basis.

The good news for the Gold ug community is that “Emerging markets are in a position to sustain the surge” because gold is such a relatively small portion of EM central-bank reserves versus the U.S. and other developed countries. To match US holdings relative to GDP, Brazil, Russia, India and China need to raise their gold reserves by 153%.



Study SHows that Gold is Not Driven by Inflation, but rather Emerging Markets
David Wilson
Bloomberg, June 12, 2012

Category: Gold & Precious Metals, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Emerging Markets, Not Inflation Drives Gold”

  1. wcvarones says:

    Wrong. Cam Harvey’s “research” is puerile. Any high school student with access to Yahoo Finance could have done that.

    The CPI is a rear-view mirror (and an arguably understated one at that).

    Gold tracks future inflation as implied by central bank balance sheets and sovereign debt.

    I have charts here that show that over the long term, gold tracks both federal debt and the Federal Reserve’s balance sheet quite well.

  2. Marcus says:

    I would love to see a chart comparing gold not to the current CPI calculations, but to the calculations prior to the Nixon years. Or even compared to the expansion of the money supply.

    It seems to me that current CPI calculations clearly understate inflation concerns and the gold chart more closely parallels the reality of expansionary money printing… or true inflation… than the government’s manipulated numbers.

  3. b_thunder says:

    Adjusting for *real* price inflation, $1200 gold (where i think it will fall before QE3 is announced) would make it the “buy of the decade.” Again.

  4. techy says:

    indians consumers own around 18k ton of gold

  5. saunderscc says:

    Should be able to replicate using the 1980 CPI methodology data available at This might be more relevant to the extent that you’d at least be comparing apples-to-apples from a CPI perspective.

  6. Moss says:

    Should be graphed against the cumulative US deficit. The CPI is a joke when measuring currency debasement. Gold is hedge against currency debasement, or if u like currency supply.

  7. Sentinel says:

    Anyone have the mathematical correlation of gold to M2? See chart:

  8. Mike in Nola says:

    Of course, the calls for comparison to our deficit assume a good percentage of the buyers are Americans. Aside from those who fall for the advertisements on Fox News, I doubt there are many.

    The flip side is that, as the EM’s decline as they appear to be doing, demand for gold will drop.

  9. JevonsParadox says:

    1) The time period used is relatively short. 2) Why use the CPI- a measure known to understate real inflation. 3) Gold has more often performed better during periods of deflation than inflation (see Jastram’s book “The Golden Constant”). 4) Perhaps gold discounts future inflation at times when paper currency is being debased. 5) The total cost to mine an ounce of gold (not to be confused with the “cash costs” is approaching $1300-1500. 6) Its not just demand that should be considered, but supply too- in this regard the big boost in price has played out as central banks tapered off their sales (decreasing supply) and then began adding to holdings (a “new” source of demand). 7) Lastly, one must ask why many central banks are adding to their gold holdings? Does it come down to declining trust in other central banks and governments in the face of intractable problems of growth (a lack thereof) and debt (what is the global endgame?).

  10. Hammer of Thor says:

    That chart reminds me of the NASDAQ in 2000.

  11. hawks5999 says:

    I think this just shows that CPI is a lie.

  12. Bam_Man says:

    It’s good that at least some are beginning to embrace a less-USA-centric view of the Gold price.
    Emerging market inflation (especially India) and punatively negative real-interest rates in most (especially China) are undoubtedly major factors in the rising price of Gold. And if recent EM Central Bank actions (stagflationary monetary poliicy) are any indication, they will continue to be.

  13. Arequipa01 says:

    Two things:

    1. the paper in question is called The Golden Dilemma and can be purchased at SSRN.

    2. How many Claude Erbs can there be?–Claude_Erb

  14. machinehead says:

    @Arequipa01 — I was able to download the Erb/Harvey paper from SSRI for free. Since there is no link to the alleged Bloomberg article, and a search didn’t locate it, I wanted to read the original paper. Here’s the ink:

    Now for the weakest claim in the paper:

    ‘Low real yields, say on TIPS, do not cause the real price of gold to be high. There is some other economic force, perhaps a fear of inflation, driving variation in both TIPS and the real price of gold.’

    But wait! Erb and Harvey found a strong correlation of 0.74 between real TIPS yields and the real gold price. Then they proceed to dismiss it as ‘spurious,’ chanting ‘correlation is not causation.’ But their evidence for this claim? Why, none at all. Merely ‘because we say so.’

    Evidently, toiling in the groves of academe grants one the remarkable power to discern which correlations are ‘causative’ and which are ‘spurious,’ by a process as powerful and mysterious as Superman’s X-ray vision. Ordinary mortals can only gawk in envy, as they toss their worthless gold off a bridge, and then heave the contents of their stomach over the rail after it.

  15. wcvarones says:


    It’s actually free on SSRN.

  16. ssc says:

    Brilliant, as good as the one that says, “crude oil price influence by emerging markets, especially China and India..”.

  17. gkm says:

    Gold goes up when it is taken out of the country and falls when it is brought to the country. Simple. If someone is taking it elsewhere, then growth prospects are better in that locale.

  18. [...] Emerging Markets, Not Inflation Drives Gold | The Big Picture [...]

  19. you know, yon’ Ritholtz, as I have, well, learned–from your Example..(Sold, to You!)

    Who? is it?? that is willing to Sell (at the Implied Price–in the Chart, above) ???

    I’ll Buy. in whatever amount that ‘they’re’ willing to “Sell”..

    as always, “We’ll” clear through your Good auspices..

    (yes, at sub-U$D 800/Au, I do mean unlimited Quantities..)

  20. Arequipa01 says:

    Sorry about the bad info re purchasing…thank you for setting me straight.

  21. ElSid says:

    The CPI? LOL. And these people are teaching the business leaders and economists of the future.