Emerging Markets, Not Inflation Drives Gold

Click to enlarge:

Kudos to Bloomberg’s Dave Wilson for spotting this study last week by Duke University Professor Campbell R. Harvey and his collaborator, Claude B. Erb. They discovered that “Gold’s prospects are less dependent on inflation than on demand from emerging markets.”

As the chart above shows,

“The relationship between gold and the U.S. consumer price index [was set in 1975] when futures on the metal began trading. The inflation gauge was set equal to the gold price as the period began.

Assuming that gold moved in lockstep with the CPI, the implied price would be about $780 an ounce, according to . Yesterday’s price on the Comex in New York, $1,596.80 an ounce, was more than twice that number.

“If gold is an inflation hedge, then on average its real return should be zero,” Erb and Harvey wrote. Instead, returns from 2000 through March of this year averaged 13 percent a year on an inflation-adjusted basis.

The good news for the Gold ug community is that “Emerging markets are in a position to sustain the surge” because gold is such a relatively small portion of EM central-bank reserves versus the U.S. and other developed countries. To match US holdings relative to GDP, Brazil, Russia, India and China need to raise their gold reserves by 153%.
Source:
Study SHows that Gold is Not Driven by Inflation, but rather Emerging Markets
David Wilson
Bloomberg, June 12, 2012

This post originally appeared at The Big Picture and is posted with permission.

4 Responses to "Emerging Markets, Not Inflation Drives Gold"

  1. AndrewMGarland   June 14, 2012 at 7:05 pm

    The posted chart shows that the gold price is not related well to CPI.
    – Which CPI measure, by the way?
    – Where is the chart relating the gold price to emerging market central bank demand/holdings?
    – No link to the original study.

    Here is a comment to consider at the above cited post by Barry Ritholtz

    === ===
    The CPI is a rear-view mirror (and an arguably understated one at that).

    Gold tracks future inflation as implied by central bank balance sheets and sovereign debt.

    I have charts here that show that over the long term, gold tracks both federal debt and the Federal Reserve’s balance sheet quite well.
    http://www.wcvarones.com/2012/01/gold-keeps-doing
    === ===

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