Could gold, the traditional and popular hedge against inflation, actually perform poorly during an inflationary period thereby frustrating its use as a hedge? For years now many have been worried that due to unprecedented central bank easing and huge government deficits we should be experiencing high inflation. Instead, with the CPI at 1.6% inflation is benign at best. We can “thank” the financial crisis for that.
The price of gold seemed to confirm inflation worries by having a stellar decade long run from $300/ounce in 2001 to over $1,800 by August of 2011. Since then, the price of gold has stalled. Perhaps gold moved up less because of inflation worries and more because it was a recipient of the money issuing forth from the central bankers? Now in anticipation that the easy money policies could start to end within a year or two could this be the reason that gold prices are stalling out?
What is equally interesting to me is that now as the economy is starting to strengthen somewhat as it leaves the financial crisis behind we could actually be on the cusp of inflation starting to pick up. As confidence returns, the massive reserves in the banking system could finally start to move out into the economy as lenders open up and demand for credit increases.
Productivity and margins are strong in corporate America and at this stage of the economic cycle as demand picks up they will have to hire more workers to keep up with sales. This would result in the wage inflation that the Fed likes to focus on. However, as inflation picks up and the Fed finally has to start reining in the money supply gold could actually decrease. It would be the opposite of what happened over the past decade. Just as stocks often price in all of the good news perhaps gold has done the same in regards to inflation? Asset prices love to move ahead of the actual events. Perhaps it is a good time for gold investors to lock in some gains if they were using it as a hedge against inflation.