This is how Gold Performs when Inflation is High

Jun 15, 2022

Brijesh Bhatia, Research analyst

Gold is back in the news as inflation soars.

Investors are once again showing interest in the yellow metal as a hedge against inflation.

But what do the charts say? How well does gold perform when inflation is high?

Find the answer in this video.

Hello viewers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

The talk of the town is the US inflation, which has hit 8.6%, the data released on Friday and it has been on the high of 40 years which we saw in 1981, and the inflation is back above 8.5% since 40-41 years now.


If I just look at the CPI components over here, interesting is if you look at the energy where the crude has seen a huge rally, natural gas has seen a huge rally, heating, oil gasoline, all have seen a huge rally

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If I just look at the CPI components energy which is up 35% in the last one year and this is the largest 12 months increase last 17 years, which is again when we saw crude prices, if you remember testing US$ 140, we have seen energy component into the CPI moving higher.

Food inflation again has been higher. We have seen agri commodities heading higher and higher and if you remember, I have done video on Thompson Reuters commodity index, where I have highlighted that it has been trending at a multiyear highs. 41% is the component of agri and agri products into the Thompson Reuters commodity index which is also trending higher.

If I look at the food component in the CPI, it's 10.1%. For the 1st time it has crossed 10% since March 1981. So again it was largely led by the food and energy into the CPI if you look at the momentum.

Secondly, if I look at what has the inflation done is, it has put pressure on equities, which was trending into the fear as well. And now the momentum is back onto the downside where the traders fell that the rising inflation puts more pressure on the equities.

We have seen Dow correcting 880 points on Friday, followed by selling pressure coming this week on Monday and Tuesday as well, and it has put an effect on to the global equity markets as well.

So we have seen Nifty correcting back toward the 46 weeks low now, where we hit the 50,659, the new low, which was 15,671 was the previous low, and again the momentum is bearish.

But what about gold? It is said that the best hedge against inflation is gold. But should you buy gold at the rising inflation? Let's look at the chart where I have highlighted the gold prices against the inflation.


So now if you look at the chart over here, let's look at back in 1975-1981 where the inflation was rolling higher and higher. Gold prices the blue line, which are on the upside and at the orange line is the inflation.

So if you look at the rising inflation, yes, at that point of time gold had seen a huge rally and was one of the best hedge against the inflation. But if I look at post 1981, look at the data. Whenever inflation data goes around one or goes below one, when it tests around one, it is the best time to invest into the gold.

So if you look at the black arrows over year, the dashed lines, if you look at the inflation when it's testing around one level, if you look at the inflation, the orange line, where I have marked the horizontal which is the 1 percentile inflation. So whenever it tests one, it gives an excellent opportunity for gold investors to look at investing into the gold.

So not once. If you look at the 1987, where inflation was tested at around one, gold has seen an upside rally and I'm not looking at 10% or 15% rally. This rally has been more than 35% whenever inflation has been testing around one percent.

So if you look back in 2001-2002, we saw inflation testing one. At that point was the time when the gold rally actually started, the multi-year rally has been started. Back in 2006, back in 2008, again we saw a financial crisis in 2008 where inflation went below 1%. But if you look at the gold rally, it was continuing when inflation was testing one.

So again, back in 2020 when inflation was below one, we have seen a gold rally, so the point to highlight over here is yes, gold is best hedge against the inflation. We have been once when the inflation rose above 6-6.5% and gold rallies.

But if you look at the most of the data where inflation was at the lower level, and after 40 years, we are witnessing this. But if you look at the gold momentum right now, it is up even after the data when it has seen an uptick above 7.5-8%, gold has been steadily trending between US$ 1,700-1,900 for quite some time now.

So we haven't seen such interest into the gold accumulation as a hedge against inflation in recent times. But the historical data as of now, it seems that whenever the inflation tests 1% it is the best time to look for gold as an investment.

I'm not looking as a hedge but at current point of time, if this is not the time for gold then when will it be? Inflation is trending higher and higher, and I believe there are various opportunities now and back in 1975-1981, I think gold was only the asset class apart from equities, which was probably the liquid one. I would not say futures trading or the spot but if you look at the physical market, gold was one that was available to hedge.

At current one of time I am not sure that whether investors are looking just as a hedge against equities or against another asset class. But if you look at the forex and bond market which have been very liquid for quite long now, creating a cushion of opportunities for the hedge against inflation now.

So I believe it is not a good time to hedge against the inflation looking at the gold prices, but definitely gold is very, very bullish and I foresee probably back to the new all-time highs. But at the current scenario, I would stay slightly sceptical into the gold and a look for 1,650-1,700 levels in gold as an investment, looking back towards a new all-time high.

Signing off, Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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