Here’s more evidence that evidence that you can be right about future inflation or dollar weakness, yet still be wrong by being long gold.
Citi: “There is no obvious relationship between the gold price and inflation. There have been times when the gold price has risen when inflation is declining, and times when gold has fallen when inflation is rising. Inflation expectations may be just as important”
In the chart below, note the sharp drop in inflation (US Consumer Price Index) most recently, shown below. Gold hasn’t budged, and actually went higher, arguably due to expectations that recent deflation is temporary. Yet if this is the case, then guess what could happen to the price of gold should current inflation expectations prove too high?
The chart below highlights how gold can track expectations (in dark blue, measured as Inflation Linked Bonds / Bonds).
Just as stocks can get ahead of their earnings growth — whereby earnings per share may jump 20% yet the stock still falls due to market expectations requiring even more growth — the same can happen with this metal.
Thus the current price of gold may already price-in very high inflation (or very weak dollar) expectations, which if not met could lead to a sharp reversal for the metal. In this fashion, many gold bulls could end up correct in their inflation (or weak dollar) predictions, yet wrong in terms of the price they paid for gold relative to their prediction.
…Just something to think about, as a continuation of our previous gold posts. Gold bugs, best of luck.
FYI, Citi’s current view is that gold will be range-bound between around $900 – 1000. The only other Citi view expressed here are the charts and excerpt above, sourced via “Precious Metals $1,000: Can gold hold?” from September 9th.