Over the past 45 years, real (inflation-adjusted) gold prices have risen when fears about high future inflation have been heightened, a study found. However, once gold prices peaked, returns were negative.

One such period started in 1980. Inflation averaged about 6.3% per year from January 1980 to January 1985, while the real gold price fell 65%. In 2011, some investors were concerned about low interest rates leading to much higher levels of inflation. Instead, inflation averaged 1.2% per year and the real gold price fell about 33% between August 2011 to August 2016.

The real price of gold is the nominal (“spot,” or quoted) gold price divided by the U.S. consumer price index (CPI), a measure of inflation. The historical average real price, known as the “golden constant,” suggests that the purchasing power of gold is constant over long time periods. If this were to hold true then the long-run real return on gold should also be zero. Previous research and historical data found the future performance of gold to be more influenced by its current real price than by the rate of inflation.

The authors of this study opine that increased gold ownership through exchange-traded funds (ETFs) could be leading to higher peaks and lower troughs for the real gold price relative to the past. Looking at the period from January 1975 to July 2020, the highest rolling five-year nominal annualized gold return was about 37% and the lowest was –15%, while the highest rolling five-year annualized inflation rate was 10% and the lowest was 1.2%. During the same period, the highest rolling five-year real annualized return on gold was 25% and the lowest was about –20%.

The authors’ key takeaway was that, although some may view gold as a long-term inflation hedge, over a five-year period, gold’s performance is explained by the variation in gold’s real price. There is insufficient data to prove gold’s ties to inflation, though the authors note that the coronavirus pandemic may lead to high inflation and that investors may expect high future inflation, in turn causing the price of gold to fluctuate for the next decade.

Source: “Gold, the Golden Constant, and Déjà Vu,” by Claude Erb, Campbell R. Harvey and Tadas Viskanta; Financial Analysts Journal, October 2020.

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