Gold investment - high inflation rates

Gold Investment – High inflation rates

Gold investment should not be measured on high rates of inflation exclusively since the performance of gold is not necessarily negatively correlated to inflation.

Since the 1970s people always believe that if inflation rates are high that gold performs extremely well and when inflation is low that gold performs poorly but from 1980 to 2000 gold declined and was in a bear market for 20 years even though average inflation rates were over 4 per cent per annum, so well above the target bands central banks might aim for and furthermore, the past 20 years, average inflation has decreased even more with an average of 2 per cent per annum in the US.

Despite the gold price has increased by almost 10 per cent per annum with a substantial outperformance of majority of traditional investments over this time period.

Consequently, the statement that high inflation is good for gold and low inflation is bad for gold is not necessarily correct.

Examining real yields should be the driver of investors to determine whether to invest in gold since when real yields fall, the gold price historically rises due to less opportunity costs.

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