Inflation & gold

Guido reckons double-digit inflation is coming, and says: “If you haven’t got any gold, stock up on baked beans.”
Now, as Giles points out, inferring that we have an inflation problem because of this week’s figures is just silly. And as I’ve said - along with MPC member Adam Posen (pdf)- there’s no reason to suppose that printing money, at least on the scale we’ve seen so far, will add much to inflation.
But let’s leave this aside, and assume Guido’s premise is right. This raises another issue: does gold really protect us against inflation?
My chart suggests maybe not. It shows annual changes in the gold price (in sterling terms) and annual inflation. You can see that high inflation is not always associated with good returns on gold. The gold price soared when inflation was high in 1980 (just before my chart begins), but it fell in 1981 when inflation was above 10%, and it plummeted in 1990-91, as inflation spiked up.
Yes, the correlation between annual changes in gold and the RPIX inflation rate has been positive since 1980: 0.29, R-squared = 8.3%. But this is entirely because of the 1980 experience. Looking at the data since January 1981, the correlation is negative.
One reason for this is simply that the gold price is astonishingly noisy. Another reason is that if global inflation rises, the world’s central bankers could reverse their slack monetary policies, causing gold to fall.
Now, I say this not to take a view on where gold’s going. I’m just  saying that fears about inflation are not sufficient to generate a bullish view of the metal.
Another thing. Guido says he’ll “bet a large amount of money that the Governor of the Bank of England will have to write to Chancellor Osborne next year telling him why inflation is over-shooting target.” He’ll not get great odds. The Bank itself thinks there’s a 36% chance of inflation topping 3% in Q1, and a 25% chance of it doing so in Q2.

Comments

[Alex]

What is it with the right and not understanding what a trend is? First they think that because 1998 was the warmest/second warmest year on record, therefore no global warming, and now they think because CPI inflation increased one month, then we'll get double digit inflation.

More and more I'm reminded of what Keynes once said, "I do not know which makes a man more conservative - to know nothing but the present, or nothing but the past."

Btw, I should point out, that you've used RPIX inflation here, when all the hysteria has been over CPI inflation, although I assume that although CPI and RPIX inflations disagree from time to time, the general trend is roughly the same, so this doesn't make much difference to your overall point.

[Tom]

"What is it with the right and not understanding what a trend is? "

What is it with the right and gold and inflation at the moment? It's like listening to a bleating army of Gollums.

[Splintered Sunrise]

What is it with the right and gold full stop? It doesn't have any mystical powers, it's just a shiny metal.

[Grumpy Optimist - Andrewe Richardson]

The case for gold is based on long-term Kondratieff cycles - which suggest that the gold bull market (which began in 2003 when Gordon sold our gold reserves) is likely to continue for around 10 more years. It is not primarily linked to inflation but to risk aversion in a world when the dollar's reserve role and that of US influence and power is in decline and to world with too much debt and no political will to learn the painful lessons and to take the medicine. Central banks are again subservient to their political masters.

I certainly believe that the case for gold is pretty strong on strategic investment grounds.

[Grumpy Optimist - Andrewe Richardson]

The case for gold is not about inflation per se but about a safe place in a world of dollar decline, a renewed subservience of central banks to their political masters and the desperate attempts by central banks to avoid the lessons and the adjustments to the excess debt of the past decade.
We have been in a gold bull market since 2003 (when Gordon sold our gold) and who could possibly begin to argue that it is over. Kondratieff long cycle insights suggest another 5 years at least.

[Nick]

It is not about inflation but the small possibility of hyper-inflation.

[Econoclast]

It's a bubble. The risk of hyper-inflation is negligible. Gold has no real income stream; people are buying purely in expectation of further price gains and they assume they can offload before anyone else. The more interesting question is why the liquidity sloshing around the system is finding its way into non-productive assets like property and gold - even in places like China, where there should be better investment opportunities.

[Alex]

HYPERINFLATION???

HYPERINFLATION???

Inflation rises one month and suddenly we should be wary of hyperinflation?!

I've seen it all now.

[Luis Enrique]

Chris you are veering close to arguing with the village idiot

[diogenes1960]

it's always good to see the meaningless "left-right" stuff come out as an explanation from commentators such as Alex. Presumably he is a "leftist" showing the unequalled quality of a leftist's analytical powers.

[Guido Fawkes]

The Posen thesis rests on the claim that QE "is a response to a deflationary crisis."

I never accepted there was a real "deflationary crisis". Of course we won't be able to settle this argument because QE supporters will claim they saw it off and opponents like myself will argue they were fighting phantoms. Posen tactfully explained that "QE eased the successful implementation of
fiscal policy stimulus". Propped up bloated government over-spending might be another way of putting it.

Am also very wary of Posen's encouragement of the BoE becoming a dealer in commercial paper. It would undoubtedly be a good thing to have wider and deeper corporate bond markets - something incidentally which Will Hutton and many centre-lefties have argued against in the past.

I just think the BoE will eventually get stuffed with duff paper.

Is it not possible to structure tax incentives to financial players and borrowers to kick-start the domestic corporate paper markets.

[Ron Stone]

If you use commodity prices, I'll bet you get a different view of gold. Either way, I would prefer to own something of real value and scarcity and not a paper "promise". Promises get broken all the time. Greece is about to break its most recent promise when it received bailout money by defaulting.