By SymmetricInfo

We often hear the phrase that gold is an “inflation hedge”. If gold were the perfect inflation hedge, then changes in gold prices would be perfectly contemporaneously correlated with the rate of inflation. 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, but lose their relationship in the past decade. This makes it difficult to believe that the recent increase in price of gold has been solely due to a change in realized inflation and weakens the case for gold as a good 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, but none in the past decade.

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 prices 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 the implied inflation rate 30 years out is only ~2%, which is in line with inflation expectations in the previous decade and does not signify high inflation expectations.

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 coincide with increases in the price of gold.


There isn’t much empirical evidence to make one believe that the decade long gold rally has exclusively to do with either realized inflation, inflation expectations or the federal reserves balance sheet. 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. 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.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
  • Greshams-law

    Indeed, gold isn’t necessarily an ‘inflation hedge’ in the terms most people use; that is, it doesn’t necessarily protect against increases in the consumer price index. However, as the author alludes to at the end, a lot of people who advocate owning gold don’t regard ‘inflation’ as increases in the consumer price index. Rather, a lot of people regard ‘inflation’ as an increases in the ‘money supply’ (and they disagree on what that is too). So, on this subject, we’re all debating using different definitions – which is rather unfortunate.

    In my opinion, if one must call gold a ‘hedge’, then it’s a hedge against increases in the monetary base. The author plotted gold against the YoY change in the Fed’s balance sheet – I think that if he put it against the $ amount of the monetary base it would be much more compelling. YoY changes in this case are not appropriate because of the nature of fiat currencies – once the Fed has increased it’s balance sheet, the new structure of prices doesn’t necessarily require further balance sheet expansions.

    This is why – in my opinion – the case for long gold short equities is so compelling (and there’s a clear trend there). Equities are somewhat dependent on the existing mass of IOU money (which is under pressure in this deleveraging environment), and gold is dependent on the Fed’s willingness to hold up that mass of IOU money via monetary base expansions.

  • The Dork of Cork

    Its the Euro Cullen – there is not enough goverment money in the Euro system – something needs to clear the debt and the free floating gold price is the mechanism.
    I recommend you research the strange events before the euro introduction – I think that maybe the strong dollar policey of the second Clinton administration was a conspiracy related to these events.
    The Swiss national bank which is not national sold half its Gold during those Euro years , also Browns bottom , the French republic selling 500 tons during the naughties.
    I think the selling was designed to give a false signal to the markets that sov yields should remain low – this exploded private credit creation.
    Many old style financial economists in Europe were blind sided by the rise in sov yields very late in the crisis with little warning – this false signal gave the impression that the private debt creation was sustainable but it was not.
    This goes very deep.

  • remcoxyii

    Comparing the nominal price of gold to rates of change seems not a very good way to visualize what’s happening. Not saying that there are strong correlations or anything, but I think these graphs can be kind of misleading.

  • boatman

    price of gold is the collective fear of instability, other than it being the baby that gets thrown out with the bath water temporarily in an equity crash.

  • troll

    Regarding gold investing in the simplest of terms: 1. better safe than sorry, 2. don’t carry all your eggs in the same basket, 3. I may lose something, but I won’t lose everything, 4. find the balance, grasshopper, 5. etc for any other common sense way of savings.

  • SymmetricInfo

    Hi Greshams-law,

    If I had to describe gold as a hedge for anything, I’d call it a combination between a hedge against the USD and a hedge against paper currencies in general. I mention that in another post:

  • El Viejo

    True, you can make money with gold, BUT it is also a security blanket and an object of worship and hoarding. It’s good to want a solid foundation in a world of shifting sands, however I can’t blame people for wanting to hoard value. Beware though, hoarding can overcome common sense signals to sell. Is there much more upside? Is this really inflation?

  • JR

    What about the ‘absolute value of the CPI’ vs. gold (at least over the last decade)? This is obviously different than the ‘CPI inflation rate’ and is tightly correlated with gold. Does that not constitute gold as a long-term inflation hedge?

  • SymmetricInfo


    The absolute value of the CPI indeed means something different from the Change in CPI or the inflation rate. And it is tightly correlated with gold in the past decade, but that is because gold has gone up in the past decade and the level of CPI tends to go up most of the time over the past 40 years (including the last decade). So its hard to look at that and think that the correlation isn’t spurious.

    Put another way, the level of the CPI measures the level of cost of goods today, and that has generally been going up most years since the 1970s. If gold were a perfect hedge for the *level* of CPI, then you’d expect it to go up in value almost every year since the 70’s, which it does not.

    Btw- I’m not saying that the inflation rate does not influence the gold price, I’m just saying that thinking of gold as *solely* an inflation hedge might not make sense. I’ve posted a link to previous post about the macro exposure you get by buying/selling gold in the comments section above. That explains how the inflation rate fits into thinking about the price of gold.

  • paul skinner

    For Christ sake!!!!!!!!!!!!!!!!

    Gold is rising due to inflation.

    Why do you guys equate inflation with the bogus and manipulated CPI??? Don’t you live and shop on this planet?


  • Uncle Tupelo

    It would be interesting to see Gold compared to a better measure of inflation such as all international monetary aggregates including credit, or some simila rmeasure of monetary debasement. CPI is not inflation. We had massive inflation from 1997- 2005…it just went into tech and housing…

  • Anonymous

    You say the chart shows 1-yr change in gold price, but it shows the gold price itself. YOu are comparing a ROC with a level (apples and oranges.

    Uncle Tupelo’s point above is also worth investigating much further.


  • Rharaz

    Any thoughts about using the “real interest rate” as a way to help determine if gold might go up or down in dollar value? The “real interest rate” is determined by subtracting the Consumer Price Index (CPI) from the three-month Treasury yield. See

  • jswede

    @DofC: very glad you mention this, as I’ve been meaning to get informed on Europe just before the intro of the Euro — another wise person instructed the same… possible there exists a write-up you know of that would address this from your perspective? otherwise, no biggie – and thanks for the reminder.

  • SymmetricInfo


    Yes, I point out elsewhere that one way to judge the attractiveness of holding paper currency is by looking at the real interest rate across all paper currencies (but primarily the USD since it is still the world’s reserve currency). The charts and article are here:

    Btw- In addition to giving you exposure to the attractiveness of paper currencies in general, buying/selling gold also gives you exposure to being short the USD relative to other paper currencies. So even if real interest rates are low in the US, but the US dollar strengthens relative to other paper currencies for one reason or another, it is conceivable that gold might decline in value.

  • SymmetricInfo

    The other way to get at a similar idea of “monetary debasement” is to look at the real interest rate (int rates – inflation rate) in currencies around the world. I cover this in another article and chart here:

  • jswede

    slightly tweaking the last chart: Gold Price and Fed Balance Sheet size have a 80% R^2 over the last 2yrs

  • Rharaz

    Thanks for your reply and the included link!

  • bart

    Using the apples-to-apples comparison with corrected CPI per John Williams and others shows the correlation to be much higher, but there is indeed more than one factor that applies to gold prices.

  • Sostegno

    Its about an perception hedge. People expect inflation, cause they know that current growthforcing money system is going to fail/ the cycle is going to end.

    Question: what happens if perception moves the market, it becomes a selffulfilling prophecy!
    Why do you think NFL is so aggressively promoting hyperinflation. They are lobbyist of shady Goldstandard theory and see an opportunity in current market situation to achieve their agenda though brainwashing.

  • Nick Flamel

    There’s no such thing as a perfect hedge of any kind, much less a perfect inflation hedge. And “perfectly contemporaneously correlated” is basically a triple redundancy.

    Other than that – great article!


    Commodities and gold reflect the level of real interest rates!

  • Widgetmaker

    Man’s peculiar fetish…………

  • Hans

    The conclusion is well stated, indeed, author!

  • The Dork of Cork

    Hi Jswede
    Although I disagree on a ideological level with the FOFOA blog , I believe it has many insights into the nature of the Euro creation.
    Other then that it is just little tidbits of info over the years that strangely resonate with me.

  • Apocalypto

    This blog post is pure nonsense. Here are just a few problems with it:

    1. This article immediately starts right out of the gate with a huge straw man argument within the first two sentences: [i]“We often hear the phrase that gold is an “inflation hedge”. If gold were the perfect inflation hedge, then changes in gold prices would be perfectly contemporaneously correlated with the rate of inflation. Is this actually true?[/i]

    No reasonably well educated, reputable source on inflation and gold would ever claim that gold is a “perfect” inflation hedge under any and all circumstances. The reasonable, educated stance on gold is that it [i]can [/i]be an excellent hedge against inflation if you’re living under a government that is deliberately debasing its currency by incurring massive debt and irresponsibly printing “funny money” by the trillions. And no reasonable person believes there is a “perfect” correlation between gold and inflation. There is a correlation between the two, but it is not “perfectly” correlative. Few things perfectly correlate to other things in life. In fact, almost nothing does (other than death and taxes).

    2. Onto the second paragraph: [i]“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, but lose their relationship in the past decade. This makes it difficult to believe that the recent increase in price of gold has been solely due to a change in realized inflation and weakens the case for gold as a good inflation hedge.”[/i]

    Wrong again. The CPI was changed in 1983 to exclude the purchase price of housing which instead was replaced with “owners’ equivalent of rent.” So the modern CPI does not capture inflation or even hyperinflation within the housing sector (other than what eventually translates to rents). This is a very important exclusion because housing is the most expensive thing any ordinary person will ever purchase in their entire life. The whole point of the CPI is to gage consumer prices. And in a time of a housing boom bubble, as occurred in the past decade, it results in: (1) more renters leaving their landlords to become owners and even landlords themselves (i.e resulting in fewer renters competing over more rental units and more landlords competing over fewer renters), (2) a glut of available housing (i.e. increased supply), which then (3) tends to stagnate or even deflate rental prices (due to simple supply and demand).

    This makes the non-housing factored CPI appear low or even deflationary during strongly [b]inflationary [/b]periods within the housing sector. That’s why you see the strong divergence between the CPI and gold on the graph he presents for the past ten years. Gold steadily rose from about $250/oz in 2002 to $1500/oz today. House prices doubled and even tripled in some markets between 2002 and 2008. Gold prices strongly correlated with the extreme inflation seen within the housing market throughout the 2000’s. And it’s not surprising at all. This was one of the greatest periods of quantitative easing and issuance of trillions of $$$$ in easy credit our country has ever experienced. Money flowed like water from a gargantuan spigot down from the heavens upon the entire country, thanks to Alan Greenspan and Helicopter Ben. The money supply was massively increased while hundreds of thousands of dollars were made available to literally almost anyone with a pulse. [i][b]This [/b][/i]is what drove up housing prices so dramatically. [i][b]This [/b][/i]is what inflation truly is, and that’s why gold so “perfectly” correlates with real inflation (as seen on the graph). In contrast, the politically tweaked CPI shows almost nothing happening during one of the most critical economic periods of time in our country’s history. And this flat inflation as gaged by the CPI is what the liars in charge used to justify more quantitative easing. The CPI lies, because its constructed by liars for liars. And don’t forget what QE did to oil prices and other critical commodities too. Oil is priced in dollars and hit $150 a barrel during this same time frame. The CPI doesn’t reflect the reality we all lived through for the past ten years – gold does.