Gold as an Inflation Hedge? The Proof Is in the Pudding

During this inflationary cycle, gold tended to sell off with any hot inflation news. Conversely, mainstream and institutional investors tended to buy when inflation appeared to be cooling. Does this prove gold really isn't an inflation hedge? Host Mike Maharrey probes this question in this episode of the Money Metals' Midweek Memo. He concludes the proof is in the pudding.

In this episode, Mike also gives an overview of last week's Federal Reserve meeting and the central bank's miserable track record on projecting the trajectory of monetary policy.  

Mike opens the show reminiscing about his grandmother often saying, "The proof is in the pudding."

"You know, it doesn’t exactly make sense. The proof of what is in the pudding?

"Well, it turns out the saying is actually a variation on an older saying, 'The proof of the pudding is in the eating!' Now, that makes sense! Proof often flows from direct experience.

"Well, when it comes to gold as an inflation hedge, the proof is in the pudding."

Mike notes that modern mainstream sentiment about gold tends to be negative, or at best apathetic.

"I’ve been writing about gold and silver for nearly a decade, and I can tell you from experience that there are a lot of naysayers out there – a lot of anti-gold sentiment. You can go back to John Maynard Keynes calling gold a 'useless relic.' Of course, he was motivated to say that because sound money is anathema to Keynesian. Governments can borrow and spend to provide stimulus when hemmed in by sound money. But this mentality has seeped into the investment community. The mainstream tends to mostly spurn gold. You’ll even hear absurd things like, 'Gold is a useless metal.' Or what was it that Warren Buffett said – '[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.'

"But Buffett’s opinion notwithstanding, gold is, in fact, an inflation hedge and it has a place in a diversified portfolio."

Do the numbers support Mike's assertion?

Before digging into the data, Mike pivots to give an overview of last week's Federal Reserve meeting. 

While the FOMC didn't do anything, Powell and Company had plenty to say. 

"I won’t get into a bunch of technical analysis since a week has passed and there has been plenty of that already, but I have to note that it's almost as if the central bankers at the Federal Reserve are throwing darts at the wall to determine the trajectory of monetary policy.

"And I'm not convinced there is even a dartboard on the wall.

"And yet, people keep selling gold and silver based on what these people say!"

Mike covers the general messaging that came out of the FOMC meeting and notes that the biggest news was the release of a new dot plot showing the expected trajectory of interest rates moving forward. It was quite different than the dot plot the committee released in March with no members anticipating three rate cuts this year. 

"Stop and think about this just a few months ago, the FOMC was convinced that three rate cuts were the appropriate trajectory of monetary policy.

"Of course, you shouldn’t be at all surprised. Fed people are notoriously bad a projecting the trajectory of interest rates, even though they're the ones literally setting the rates."

Mike also reveals a dirty little secret - even without rate cuts, we're seeing more inflation. The money supply has started to increase again. This is, by definition, inflation. 

"Fed rate cuts and balance sheet reduction have reined in inflation a bit as measured by the CPI, but the impact of that tighter monetary policy has run its course. Inflation (properly defined) is already on the rise, and the central bank is about to give it a big boost with rate cuts.

"So, yeah, the demise of inflation is greatly exaggerated."

So, why do mainstream and institutional investors keep selling gold at every hint of hotter price inflation? Isn't gold supposed to be an inflation hedge? Why sell a hedge if there is going to be more inflation? Does this mean the "gold is an inflation hedge" mantra is a myth?

And how have these sellers fared?

Mike digs into the numbers, comparing the percentage gain for gold with the increase in inflation as measured by CPI. He uses three key dates  - June 2021 as price inflation heated up, the beginning of this century, and 2011, the end of the previous bull run.

While the correlation breaks down for short periods, gold has generally outpaced price inflation during this century.

So, I’m just gonna throw this out there - maybe the 'smart money' that sold gold during this inflationary run wasn’t so smart after all.

But the fact is that most investors don't hold any gold at all. 

"If you think that inflation is alive and well, you might want to consider getting some gold. And silver too. Because as I discussed in length a couple of weeks ago, silver has historically outperformed gold in a gold bull market. So, yeah, now is the time to call 800-800-1865."

Articles Mentioned in the Show

Inflation Is Dead! Or Is It?

The CPI Lie! Price Inflation Is Even Worse Than Advertised

The Fed Hasn't Done Enough to Beat Price Inflation

Silver Shines as Much of More Than Gold