The World Gold Council today unveiled research that advises US wealth holders that exposure to gold acts as an effective hedge against future possible dollar depreciation and rising inflation. The research, conducted by Eric J. Levin of the University of Glasgow and Robert E. Wright of the University of Strathclyde, confirms the long-term measurable relationship between the price of gold and the US consumer price index, which substantiates gold’s importance as a long-term hedge against inflation.
Chart 1: Exchange traded funds gold holdings 1
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| Source: WGC compilation from www.exchangetradedgold.com and www.ishares,com |
1. Indicated funds only
The primary conclusions of the research, "Short-run and Long-run Determinants of the Price of Gold", include:
There is a long-term relationship between the price of gold and the US price level
The US price level and the price of gold move together in a statistically significant long-run relationship, supporting the view that a 1% increase in the general US price level leads to a 1% increase in the price of gold
Following deviations from this long-run relationship in response to short-run factors, the gold price has reverted to its long-run inflation-hedge value with remarkable consistency, although this reversion to mean typically takes around five years
The study concludes:
"If gold is a long-run hedge against inflation, and if it is true that real dollar depreciation against other currencies is inevitable, US wealth holders should profit from holding gold during this period."
The research suggests that dollar depreciation will lower the price of gold to investors outside of the USA, which will in turn increase demand for gold and raise the US dollar price of gold. Combined with gold’s proven role as an inflation hedge, this means that US wealth holders will benefit from gold exposure during a period of sustained dollar depreciation.
Eric J. Levin & Robert E. Wright said today:
"There does appear to be a consensus that US dollar depreciation and the likely rise in inflation rates are inevitable – the only issue being when it will occur and whether the adjustment path will be smooth or disorderly. If US wealth holders also support this consensus, then our research suggests that it is time they were looking to gain an exposure to gold if they haven’t done so already."
The research also addresses the inflation hedging properties of gold in the currencies of the major gold-consuming countries outside the US, taking into account the domestic exchange rate relative to the dollar and domestic consumer price index movements. This part of the research was conducted at a less formal level, but it also suggests that real gold prices, denominated in the home currency, deviate in the short-term from home country inflation hedge price with a long-run tendency for gold prices to revert to the long-run hedge price.
The authors continued:
"The major gold consuming countries outside of the US - India, China, Turkey, Saudi Arabia and Indonesia – have been rational to purchase gold as it has proved more than adequate as an inflation hedge. If we take exchange rates between the US dollar and the home currency and the home country consumer price index movements into account, for these countries, the actual dollar gold price over the last 30 years has far exceeded the dollar gold price required to provide an inflation hedge."
Click here to access Short-run and Long-run Determinants of the Price of Gold.
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