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By Rob Curran
August 6, 2021
Gold Bar With The Phrase In Gold We Trust Chiseled In Front
Money; Shutterstock

Wall Street can’t stock talking about inflation. But investors who bet on gold -- long one of the most popular inflation hedges -- are still waiting for their big pay off.

For years, the yellow metal has been pitched as a way to help investors protect their wealth against rising consumer prices. It’s an intuitively simple proposition: Inflation occurs when the value of the dollar or another currency declines, usually because governments print too much money. By contrast gold has been seen as valuable for thousands of years, and its supply is fixed by miners’ ability to pull it from the ground.

Signs of inflation are all around. Everyone from Procter & Gamble to McDonald’s, from General Motors to Exxon Mobil is hiking prices to keep up with higher ingredient costs and competition for workers. Logjams in the supply chains of computer chips and other components have caused shortages of cars and appliances, driving up prices of durable goods. The Labor Department’s index of consumer price inflation has jumped by about four percentage points since February, with prices up by an average of about 5% from a year earlier in June.

And yet, the price of gold futures are effectively flat since February, trading around $1800 an ounce, about 12% below their peak above $2000 recorded in August 2020.

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Gold and inflation

A long-term chart shows that gold’s reputation as an inflation hedge is complicated. “Gold bugs” first emerged in the 1970s, when financial firebrands such as Howard Ruff preached investment in precious metals as the only cure for a coming inflationary apocalypse. Sure enough, consumer prices and wages spiraled into runaway inflation for much of the 1970s, but gold prices initially advanced slowly. Only in 1979-80 was the gold bugs’ prophecy fulfilled as gold prices roughly trebled in two years.

This time around, the gold bugs may have been too early rather than too late. The first predictions of inflation popped up on business television at the same time the first stimulus checks were popping up in Americans’ bank accounts, in spring 2020. Gold futures took flight at the same time, and finished 2020 with a 28% gain, one of the strongest advances since 1980.

Is inflation really here to stay?

The problem is the new era of inflation that gold’s 2020 gains were foreshadowing may not last. Federal Reserve Chairman Jerome Powell is the foremost of many inflation watchers who argues that one-off effects of the economic reawakening after pandemic lockdowns – including the computer-chip shortage and supply crunch in lumber markets – have caused a “transitory” increase in prices.

Mixed economic data and the threat of another wave of lockdowns mean that investors’ concerns swing from “runaway inflation” one week to the “prospect of a deflationary spiral” the next, said strategists at money manager Blackrock Investment Institute, in a July note to clients.

What’s more these days, gold also has more competition for those hedging against inflation. Cryptocurrency salespeople have touted the digital assets as a way to protect investors' money from the erosion of the dollar's value that would accompany price increases.

Gold futures could go on another run if the outlook for inflation becomes clearer. For now, the big question for gold prices going forward was posed by analysts at Bank of America Securities in a recent note to clients.

“Inflation: transitory or persistent?” The analysts asked. “Investors say: TBD.”

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