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Is gold really a good gauge of inflation?No, says Claude Erb of the Trust Company of the West and Campbell Harvey of Duke University.
In a new working paper titled “The Golden Dilemma”, the pair take up the key drivers of gold and put them to the test.
According to the authors of the paper, some of the most common claims about the influencers of gold’s value are not true.
Inflation is a common reason cited to own gold. First, a very literal look. This graph shows spot gold prices against the U.S. consumer price index, a common measure of inflation. The red line is a regression that projects the implied price of gold were it determined by the CPI. It shows a mild positive relationship, but also that gold is volatile, does a bad job of tracking the CPI, and is wildly expensive compared to its utility as a hedge. The current price implied by the CPI is $780.
Source: The Golden Dilemma, p. 4
Claude Erb and Campbell Harvey argue that this is a classic case of spurious correlation. One could argue that low yields cause high gold prices and vice versa. It is additionally possible that low yields and high gold prices are both driven by the some common external force, like fears of hyperinflation.
Source: The Golden Dilemma, p. 16