The Impact of Inflation and Deflation on Gold Performance

The World Gold Council recently commissioned Oxford Economics to carry out a study on how gold performs in both an inflationary and a deflationary environment.

A useful question to ask as currently it would seem as though we have a bit of both going on.  Globally many asset prices such as housing are falling while we see inflation in many commodities such as food, oil etc.  Also the inflationary environment seems more heightened in the developing world while the western world seems to be experiencing more low growth, lower inflation and even deflation in some areas.  (No that we’d call 5% inflation here in NZ low!)

The below video outlines briefly how the study was carried out and some broad conclusions draw from it.
The full document can be downloaded from the World Gold Council site.  You do need to register but it is free.  http://www.gold.org/download/rs_archive/the_impact_of_inflation_and_deflation_on_the_case_for_gold.pdf

However below the video we outline the main points contained in the document.

Report Summary:

• Gold holds it’s value well in real terms over the long term, but factors such as political turmoil, financial stress, real interest rates, inflation, central bank activity and the US dollar exchange rate it can move away from it’s average performance.
• Using a model which looked at golds price from 1976 to 2010 they found that gold performs relatively strongly in a high inflation scenario and also quite well in a deflationary environment such as during a wave of defaults in the eurozone.
• The study confirms golds role as a hedge against extreme events.
• And that gold has a lack of correlation with other financial assets and so is useful in stabilizing the performance of a portfolio.
• They found that gold’s optimal share in a long-term UK portfolio to be 5% (assuming 2.25% growth and 2.5% inflation).  But varying these assumptions can mean gold should make up a larger portion such as in a higher inflation environment or a low growth, lower inflation scenario, where gold has a low correlation with other assets.

Read more: Could Stagflation Happen Again?