High inflation not gold success measure

gold inflation

Individuals should look beyond inflation when deciding to invest in gold as the two are not always linked, a wealth manager has said.

High rates of inflation should not be used exclusively as an indicative measure to determine whether to invest in gold, a wealth manager has said.

Speaking at the SMSF Association’s recent SMSF + Investor Virtual Event, Perth Mint listed products and investment research manager Jordan Eliseo revealed historic data shows the performance of gold is not necessarily negatively correlated to inflation.

Eliseo cited the movements in gold prices and inflation from the 1970s to now as evidence the perceived relationship between the elements is flawed.

“In the 1970s, during that decade, inflation rates were very high and gold performed spectacularly and that’s why people think if inflation is high, gold does well and if inflation is low, gold does poorly,” he said.

“But if you look from 1980 to 2000, average inflation rates were still over 4 per cent per annum, so well above the target bands central banks might aim for. But [during those 20 years] gold actually declined – it was in a bear market for all that time.

“Now if you look at the last 20 years, average inflation has dropped even further. It has only averaged just over 2 per cent [per annum] in the US over the last 20 years. Yet the gold price has increased by almost 10 per cent per annum and has substantially outperformed the majority of traditional investments over this time period.

“So it’s clearly not as simple as saying high inflation is good for gold and low inflation is bad for gold.”

According to Eliseo, it would be more prudent for SMSF investors to examine real yields to determine whether an allocation to gold is appropriate. He used a comparison between the gold price and the real yield on a 10-year US Treasury bond from 2003 to 2019 to illustrate this point.

“The correlation is very clear – as real yields fall, the price of gold has historically risen. That makes sense because there is less opportunity cost in investing in gold,” he noted.

“So this to me is a far more important driver that investors need to be aware of when it comes to analysing the gold market.”

Last month, Datt Capital stated that investors can still rely on gold to continue providing solid returns despite sluggish economic growth.


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