Is gold really an inflation hedge?

We often hear the phrase that gold is an “inflation hedge”. If gold were the perfect inflation hedge, then the rate of inflation would be perfectly contemporaneously correlated with changes in gold prices. Is this actually true?

Gold vs. realized inflation

The chart below shows the inflation rate (CPI Yoy) vs. the one year change in the price of gold. Its clear that the lines seem correlated back in the 70’s and 80′s and somewhat correlated in the previous 4 years, but have a variant relationship in the middle. For example, in the early 90′s inflation was ~5%, but gold prices were basically flat and in the late 90′s inflation was at 3%, while gold prices were not increasing. This makes it difficult to believe that increases in price of gold have solely been due to a change in realized inflation and weakens the case for gold as a timeless inflation hedge.


Gold vs. inflation expectations

One might reason that it is not realized inflation that gold is a hedge for, but the expected inflation rate. Below we show the same graph of gold prices, but this time we compare it to the University of Michigan Survey of Inflation Expectations 10 years out. Again, we see a correlation in the 70’s and some in the past few years, but the period in the middle has some years where inflation is high, but gold prices are falling.


Gold vs. Breakeven rate

Just to be thorough we’ll assume that it is conceivable (though frankly not probable) that because the Michigan Inflation Sentiment surveys the general population, the survey results are not representative of inflation sentiment amongst financial market participants. In the graph below, we show gold price changes vs. the 30 year breakeven inflation rate (the breakeven inflation rate is calculated from the difference in yields from 30 yr inflation linked bonds and treasuries). You see that in recent years spikes in the gold prices don’t always coincide with spikes in the breakeven rate and vice versa .

Gold vs. Federal Reserve Balance Sheet

One sometimes hears that the recent increase in value of gold is due to the radical increase in the size of the Fed’s balance sheet, but for one reason or another, this hasn’t been reflected in the inflation expectations of the market. Here is a graph showing changes in the size of the Fed’s balance sheet alongside gold prices. Again, we do not see any compelling relationship. The increase in the Fed’s balance actually coincided with a decrease in the price of gold and prior increases in Fed’s balance sheet did not always coincide with increases in the price of gold.


There isn’t compelling empirical evidence to make one believe that changes in realized inflation, inflation expectations or the federal reserves balance sheet are always closely tied to changes in gold prices . However, based upon our previous post about the macro exposure obtained by buying/selling gold, thinking of gold simply as a hedge for inflation may miss the bigger picture. The fundamental reason gold has value is that it is an alternative to paper currency, and what makes gold attractive to hold vs. a paper currency is what it yields on a real basis (its real interest rate). While high inflation rates might be one variable that goes into determining whether a currency is attractive to hold, it is likely not the whole picture. It is key to understand that the exposure you obtain from buying/selling gold is not exclusively linked to the inflation rate.