from Gold Core:
Recent research has begun to cast some doubt upon the inflation hedging capacity of gold by Dr Brian Lucey.
The inflation experience over the last 40 years, since gold began to float freely, has been very mixed. In the 1970s we were concerned in relation to inflation, perhaps even fears of hyperinflation; not the talk is of deflation or disinflation.
The reality is that the relationship between gold and inflation is very time varying.
Research of mine (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2320754) found that when you exclude the 1980s there was in fact no stable relationship, on average.
The nature of the time variation was mainly explicable by the trade weighted value of the US dollar (which of course is partially determined by inflation) and this strengthened the idea of gold as a money rather than as “just another asset”.
As important as gold being, or not, a hedge is over what period. It is conceivable to have an asset that performs a desired function over the short term but not over longer. More recent work (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2670896), using some sophisticated methods borrowed from audio processing and geophysics, allows us to decompose any hedge characteristic into various frequencies.
A further issue is around what kind of inflation – if we knew that inflation was to be 10% we could act. So it is important to look not only at realized but also at unanticipated inflation. Leaving aside the issue of how to obtain a decent forecast (to allow for a decomposition into anticipated and unanticipated) we find some very interesting findings.
First, yes, the 1970s and early 80’s do see gold as a hedge against actual inflation.
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