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Gold’s Inflation Problem (IAU, SLV, GLD)

 March 09, 2012 04:18 PM


Gold goes up with inflation. Except when it goes up regardless…  EVERYBODY'S fretting about inflation. Central bankers say there's too little, or will be (just you wait). Lesser mortals feel there's way more than the official numbers let on. And finance professionals think there's a lot more ahead.

"By the time inflation becomes evident," reckons John Paulson of the $14 billion Paulson & Co. hedge funds, "gold will probably have moved, which implies that now is the time to build a position."

[Related -Perfect Storm Driving Gold Higher]

"As inflation picks up, the real price of gold goes up," agrees Jeremy Grantham of the $97bn GMO in his latest letter to clients. And the only asset class with a positive correlation to inflation is gold, according to Credit Suisse's latest Global Investment Returns Yearbook.

So far, so bullish if you agree with Paulson, Grantham and pretty much everyone else that inflation is set to start rising. Because judging by the late 20th century – after gold prices were cut free from their $35-per-ounce peg in 1971 – gold goes up with inflation.

[Related -SPDR Gold Trust (ETF) (GLD): 3T Analysis: Target $1,400 but Box Bound]

Only problem is, gold has already moved – rising six-fold and more in nominal terms despite the quiestest decade for official US inflation since the 1950s.

What to make of it? First, and to repeat yet again, gold is not simply about inflation. It wasn't in the 1970s, nor the 1980s, and it isn't today. Gold is about inflation and interestrates. Because low or negative real returns on "risk free" bonds and cash force cautious savers to turn instead to a rare, indestructible home for their money.


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