Swings in the US dollar have no long-term impact in the price of gold…[and] gold [isn’t] an inflation hedge [either so what is it then? Read on!]
Long-Term Gold vs. USD Index
Below is the chart with the index of gold and the dollar set to the same base year, 1997.
Gold vs. the CPI
Gold fell from $850 to $250 from 1980 to 2000 with inflation every step of the way.
…[Given the fact that inflation is understated, though, one can conclude that]…gold is even less of an inflation hedge – but there is one exception…[and that] is extremely high rates of inflation, especially hyperinflation.
In case of hyperinflation, nearly any storable physical asset is a hedge: cheese, cigarettes, gasoline, etc. so, in case of hyperinflation, there is [actually] nothing unique about gold as an inflation hedge.
Summary of the above:
- A function of the US dollar in any meaningful way
- A measure of inflation
- A good hedge against inflation, except extreme inflation and hyperinflation where any storable asset is a hedge
…so what is it?
Gold Is A Measure of Faith in Central Banks
…[As can be seen in the chart below] the price of gold is primarily a measure of faith in central banks [so,] if you believe central banks have everything under control, don’t buy gold.
If you believe monetary madness, negative interest rates, and negative rate mortgages prove central banks do not have things under control, then you know what to do – buy gold!