Why gold and inflation is so close?

Over the last five to ten years we have been bombarded with comments that gold is a hedge against inflation, and wise. Wise people invest in precious metals to protect themselves against an out-of-control behavior of government officials.
People like Marc Faber, often in the air and cyberwaves, touting the idea that since the central bank inflating the money supply, it is time to stock up on gold is the only asset in the world that has a real value, implicitly indicates that it is more resistant to speculative activities, and the socialist government. Read on, we promise to present some surprising facts in this article.

How gold to protect themselves against inflation?

Gold and Inflation

So be wise to invest in gold to protect themselves against inflation. It is common knowledge that every time people thought the same thing and act the same way, rationalization is just an excuse for all kinds of craziness, but even so, how strong the relationship between gold and inflation it? Gold has not stopped running in the early years of the millennium, driven by easy money policy of the central bank world, while inflation remained within the range of calm in the US and elsewhere since Paul Volker`s decisive leadership that public` American revival of confidence in the Federal Reserve's commitment `s to keep price pressures under control. The average value of the end-year inflation statistics are slightly 3.2% over the last 30 years. That figure is above the target federal Reserve`s, but not a sign of failure in our opinion, because it is skewed to the higher side with very high rates in the 80s.

One could certainly make a logical case, at least at a basic level, the gold which is a play on inflation, because the supply is limited, and intrinsic value in many cultures. That is the main basis of the argument many people in the financial world. By examining the cross-correlation between oil, gold, and inflation for 30 years, starting in 1980, and up to our day, we are able to achieve some surprising conclusions.

First examine the relationship between the price of gold the end of the year in the period 1980-2009, and the annual CPI inflation rate in the US by introducing another seven years at 95% confidence level. As you can see in the chart above, almost no clear relationship between year-to-year CPI and the price of gold. Correlation never rose above 0.2 which is far below the red line that indicates the lack of a statistically significant relationship between the two quantities are measured.

Indication that the gold price ballooned

Gold is just as speculative instruments, such as stocks, commodities, and their derivatives, and almost no one single reason to justify the blind faith shown by many people in the shine of metal. Is it possible that gold can be expensive? Very few will reject it. Is it possible that it can be very expensive? It is, in fact, it happened in the past, and there are indications that we are in a period other than a frothy, bubbly gold bubble.

All of which is not to say that gold will not rise. There is a great possibility that the gold price will bubble up to a few thousand dollars in the next few years, but it will not be the result of a prudent investor hedge against inflation in a way that we were told that they did.

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