Gold is a long-term inflation hedge and safe haven, said Gary Wagner, Editor of the GoldForecast.com and Jeff Christian, Managing Director of the CPM Group.
Speaking to David Lin, Anchor and Producer at Kitco News, Wagner and Christian agreed that under certain conditions, gold is also a hedge against stock market volatility.
Gold, An Inflation Hedge?
Addressing the idea that gold’s role as an inflation hedge means that the price should follow the rate of inflation, Christian explained that the metal does not hedge on a short-term basis, nor does it move up when inflation is constant in the low single-digits.
“The correlation between changes in inflation and changes in gold prices is 9 percent,” he explained. “… Gold is good at protecting you against hyperinflation, but it’s not particularly good at protecting you from that gnawing 1 to 3 percent inflation.”
Hyperinflation is often defined as a at least a 50 percent monthly rise in prices.
Although Wagner agreed with Christian’s analysis, he added that gold is a long-term inflation hedge. “Gold is an excellent hedge against inflation, but it’s not sensitive to short-term moves,” he said. “But over time, what we have seen is that it has the same buying power.”
Wagner provided an example to illustrate his point.
“In 1910, with one ounce of gold, you could buy a night at the Plaza… you could buy a nice suit… and a steak dinner,” he said. An ounce of gold today can still purchase those same items, according to Wagner.
Gold as a Safe Haven
Christian defined a safe haven asset as having a low correlation to stocks and bonds, and thus protects investors against volatility. “Overall the correlation [between gold and equities] is negative 4 to 5 percent in the long-run” noting that gold is a long-term safe haven asset.
Stock markets have experienced major sell-offs, with the S&P 500 down 13 percent year-to-date.
Christian added that these recent events demonstrate gold’s safe haven properties. “The second quarter has been bad for gold and silver, and they’ll probably be down,” he explained.
“But, if you look at the first quarter… silver was the best-performing asset of 11 asset classes at 7.7 percent increase over the first quarter. Gold was second best at 6.6. [percent]… Anybody who tells you that gold and silver haven’t done their job in protecting the value of their portfolio, this is American education at its worst,” he said.
Wagner said that in general, equities and gold move in opposite directions. However, he highlighted quantitative easing as an exception to this trend.
“If you look back to 2008, when they were flooding liquidity into the markets… you had both U.S. equities and gold moving up,” he said.
Supply Shortages, The Fed, and Inflation
Wagner posited that U.S. inflation is due to supply shortages, exacerbated by the Ukraine conflict. He added that this is far from “transitory,” saying, “Are [inflationary pressures] transitory? I think they’re a lot more persistent than the Fed assumes that they were. My sense is that inflationary pressures will run high at least through the end of the year, maybe the first quarter of next.”
Wagner added that the war in Ukraine needs to be resolved before prices return to stability.
To find out Christian and Wagner’s gold price forecasts, watch the above video.
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