Click to enlarge:


Source: Merrill Lynch


We have pointed this out before, but its worth repeating: As Merrill Lynch pointed out earlier this week, “the link between inflation and gold is very limited.

The correlation between Gold and Inflation is not what most people believe it to be. This variant belief could be significant in light of the most recent QE.

Here’s Merrill:

Opened-ended QE is causing some investors to worry that inflation will get out of hand. That has helped drive gold prices higher, as investors look for places to hedge against a potential rise in inflation. [See charts above]

First, gold is not part of the CPI bundle, so a movement in gold will not impact inflation. Second, gold is not a good predictor of inflation. As the nearby charts illustrate, gold prices are much more volatile than headline inflation. Finally, with the correlation between gold and inflation on a yoy basis of just 0.42 and on a month-over-month basis of 0.11, gold is not a great hedge against inflation. Investors would be better off owning TIPS if they are looking for protection against a potential rise in inflation.

This is worth paying attention to in the world of QE ∞.



BofA/Merrill Lynch
September 17, 2012
Morning Market Tidbits

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.

26 Responses to “Gold vs. Inflation”

  1. Petey Wheatstraw says:

    Gold is not a hedge against inflation (I’d be hard pressed to offer any surefire hedge against inflation, at this point).

    Gold is a hedge against uncertainty and insecurity (the latter two things being very prominent economic conditions, right about now).

  2. gloeschi says:

    Gold not directly linked to inflation, but to real interest rates. If real interest rates > 2%, gold price falls. If <2%, then gold rises. The leverage factor is approximately 6.5 for rising, and 5x for falling gold prices. Make your own model; works since 1980's. Based on idea by Eddie Elfenbein (I believe).

  3. kensdad says:

    Headline CPI is a useless indicator. Comparing anything to headline CPI is going to be an exercise in futility.

  4. gordo365 says:

    THE biggest conclusion after reading this – BofA/Merrill doesn’t make any fees when people buy gold.

  5. Bokolis says:

    Perhaps the implied price of gold in a Gold Standard world>>>people’s assessments- conscious or otherwise- of the likelihood of such an occurrence, has a function in the price of Gold. I’ll wory about building a model when everybody else’s start working.

    QE-whatever~ watering the garden with a kinked up fire hose>>>turning up the spigot to full blast to compensate. So, when the hose un-kinks…

  6. Tim says:

    TIPS are a great hedge against inflation and should be considered as part of a balanced, diversified portfolio.

    My siblings and I each inherited a few hundred old silver US half-dollar coins, with no real numismatic value. My share is only worth ~$15k, – at the moment, but there’s a certain comfort in physically owning a little precious metal, both as an inflation hedge, but also as doomsday currency.


  7. Petey Wheatstraw says:


    As long as it holds or increases in value, it’s not crazy. It is the ultimate hedge against crazy (other than a gun, and then, all bets are off). What IS crazy is what has happened to our economy over the past decade (or two, or three).

  8. Bam_Man says:

    Investors would be better off owning TIPS if they are looking for protection against a potential rise in inflation

    Yeah, right up until our gubbermint goes “full-Argentina” and the official CPI numbers understate actual inflation by 100% or more.

  9. bobnoxy says:

    Have you seen the projections for the national debt over the next decade? Add in state and local debt and the unfunded liabilities, and see how both sides are pandering to the old people about how their entitlements will be better protected by them than the other guys?

    What happens when bond holders go looking for something better than 1.8% for ten years? Deficits, interest costs, and rolling over existing debt each year will be somewhere around $4 trillion. If bond buyers go elsewhere in search of better gains, who will buy it all, and with what? Even Bill Gross thinks bonds suck now.

    The only way to keep up with all that will be printed money. Boodles of it. Buy gold.

  10. carleric says:

    Gold isn’t a hedge against inflation so much as it is simply a hedge against currency debasement. I own some precious metals as the Fed is destroying the dollar. How complicated does it have to get for Merrill Lynch and their admirers?

  11. genevakiwi says:

    I think most people buying gold would agree that it is not good a hedge against the most recent calculation method of the cpi.
    If you want to hedge against cpi then TIPS are obviously a way to go. If you want to hedge against an inflated money/credit supply then…

    I’m surprised (well, surprised it wasn’t an Inviticus post) that something this “mainstream media” like is entertained here.

  12. Hammer of Thor says:

    BR, I was having a discussion with a friend recently about how CPI is useless and in reality inflation is much higher. His response was “thanks captain obvious” and reminded me of this “Substitutions and Hedonics: Inflation Data Absurdities” written by some blogger five years ago.

  13. bart says:

    A more accurate inflation rate that takes more factors into account (and corrects errors in CPI-U like OER understatements, understated rent, Boskin effects, reverse hedonics, lack of fully inclusive medical costs, etc.) shows a MUCH stronger correlation to gold.

    The true rate of inflation is also far from the only factor that influences gold prices.

  14. Mick Lovin says:

    That top chart looks like its a time to BUY BUY BUY…

  15. jankynoname says:

    yeah, rather than saying “the link between inflation and gold is broken”, it would be more accurate to say “the link between inflation and the CPI is broken.”

    Take a look at a chart of the gold price versus total reserves held at the central bank. I think you’ll find that the relationship is quite close. Increasing money supply = inflation. We just need to wait for the excess reserves to come off the Fed’s balance sheet. This is why we should buy gold.


    BR: Those two conclusions are not mutually exclusive

  16. DeDude says:

    With its huge volatility, Gold is not a hedge against anything, and sure as heck would be a disaster as a currency. It is a bet on uncertainty. When everybody fear that Armageddon is coming, then it gives great returns. If Armageddon actually arrives it will be useless – because what your would need would be guns, seeds and potatoes – and nobody would trade those to you for some stupid yellow metal that can do nothing but weigh you down.

  17. Interesting post.

    Personally, I see gold not as an inflation hedge, but rather as a “disintegration” hedge. If the markets have confidence that the “system” won’t implode or, at least, drastically change, gold need not be the asset that glitters most. While I’m extremely leery when expressing my own “fundamental” opinions, I believe that the ascent in gold prices we witnessed since the early 2000’s was more due to the reshuffling of the world order (i.e. the advent of the Euro, the role of the USD as world reserve currency in its last legs, the ascent of China, etc.) than fears of inflation; all those factor are geopolitical an affect the way the “system” works and who holds the upper hand.

    The best explanation of why gold has a role to play which goes much beyond “inflation hedge” can be found in Fofoa’s blog. It takes time and dedicated effort to understand all the aspects that Fofoa’s view encompasses but the reward is worth the effort. Personally, I’ve greatly influenced by his views.
    Here’s a link to his blog:

    As to inflation and gold, the charts are saying clearly that silver is stronger and it is likely to continue to outperform in the medium term.

    If you plot the SLV/DIA ratio you can see that silver clearly broke out about the latest significant highs of the ratio. In other words, SLV is much stronger than DIA and the ratio is in a very bullish formation.

    We cannot say the same about gold. Although it is in a bull market, the GLD/DIA ratio is failing to break previous relevant highs. So, what the ratio is telling us is that stocks are much stronger than gold, in spite of gold’s recent price gains.

    Furthermore, the BLV/SPY ratio is in a clear down trend suggesting that stocks are benefiting more from QE than bonds. However, the BLV/GLD ratio still shows that BLV hasn’t been defeated by gold yet.

    If gold is really to shine, it should become the greatest beneficiary of QE. This is not what the charts are saying.

    You can find the relevant charts here:




  18. jb.mcmunn says:

    Wrong graphs. Try a chart of gold vs monetary base to see the relationship.

  19. mns3dhm says:

    At the risk of revealing that I am a complete idiot, shouldn’t the relationship between gold prices and inflation be viewed from a global perspective? Doesn’t a lot of the demand for gold come from places like China and India, where inflation is much higher than in the U.S.?

  20. mns3dhm:

    you’re not an idiot or we all are idiots. You ask a valid point. Truth in investment matters is always very elusive.

    Better to look like an idiot than to take at face value of the charade economist bombard us with (sorry for finishing with a preposition).


  21. b_thunder says:

    During infinite QE, investing will be an exercise in finding such assets that will experience the strongest marginal “inflow” from the QE money creation (if one can call $40/$85B per month “marginal.”)

    Gold, which doesn’t pay dividends and is only “profitable” if you find a greater fool who’ll buy it from you, and which was trending higher even before all the QEs, will for the 1st time in American history have sustained “inflow” of funds, the sustained demand. That $40B (or 85B, or more “if necessary”) has to find a place, and I bet it’s not going to be just stocks @ record high PE, or bonds, or more mortgages.

  22. MacroEconomist says:

    Gold is a hedge against poor returns in traditional asset classes. Gold is a hedge to negative real interest rates. If high inflation is met with even higher interest rates, then gold won’t rally. Likewise, if low inflation is met with even lower interest rates, gold can rally.

    This ain’t rocket science.


  23. mitchn says:

    @DeDude wrote:

    >If Armageddon actually arrives [gold] will be useless – because what your would need would be guns, seeds and potatoes – and nobody would trade those to you for some stupid yellow metal that can do nothing but weigh you down.

    Clearly, Cortes and his fellow conquistadors didn’t get the memo before they tried to flee Tenochtitlan, laden with gold, on the night of June 20, 1520.

    The more things change, the more they stay the same…

  24. barniebrains says:

    QE to infinity was predicted by Jim Sinclair who is famous for calling the gold top in 1970. He also predicted in early 2000 that gold would rise from $200 to $1650 by 2011. He now sees gold through $3500. Gold is a currency that cannot be printed. During a currency war, all currencies are devalued relative to gold. Even Ray Dalio believes that holding 10% of your portfolio in gold is reasonable. And now Bill Gross is on board.

    Your argument (similar to Buffets) that gold is useless and cannot be valued (not correlated to inflation) ignores the massive global money printing binge underway across all major central banks. Will QE to infinity really improve the employment situation or housing? QE1 and QE2 didn’t seem to have much of an affect.

  25. DeDude says:


    yes when panic sets in, stupidity and poor judgement is not far behind ;-)

  26. [...] gold relying on a link with inflation that doesn’t really exist? Blogger Barry Ritholtz recently linked to a note from Merrill Lynch that pokes some holes in the correlation. Specifically, Merrill said, [...]