Using Gold as Crystal Ball for Inflation

Source:

...You have probably heard the idea that gold acts as a hedge against inflation, but this is not quite the right description. An up move in gold prices signals a coming up move in the inflation rate about 14-15 months later. So if you believe that inflation is going to pick up and want to protect yourself, then the best course of action is to buy gold 14 months ago...

...I have always believed the correlation of asset classes to be volatile. Coaker has a good series of papers examining the subject. For the most part I feel the same way about factors and macro variables. However, there are certainly relationships that do exist. After all, that's what economists, (some) quants, and intermarket analysts spend much of their time on.

I posted a couple charts earlier in the year on the relationship between gold and inflation, and here is a guest post from the inspiration behind the charts.

Tom McClellan is the editor of The McClellan Market Report, a twice monthly newsletter, as well as its companion Daily Edition. He works with his father Sherman McClellan, who was one of the co-creators of the famous McClellan Oscillator and Summation Index, which are technical indicators that measure the strength of market breadth...

The below commentary is from Tom:

Gold has gone above $800. But if you are not a gold bug, a jeweler, or a dentist, you are probably reacting to that news with a shrug and a "so what?". Well, here is the answer.

In our business of market timing, gold's biggest value is as a harbinger. Whatever is coming down the pike for a lot of things tends to show up first in gold prices. Precisely why this is the case is far less important than establishing that it is the case...

the price of gold serves as a leading indicator for what inflation is going to do. You have probably heard the idea that gold acts as a hedge against inflation, but this is not quite the right description. An up move in gold prices signals a coming up move in the inflation rate about 14-15 months later. So if you believe that inflation is going to pick up and want to protect yourself, then the best course of action is to buy gold 14 months ago.

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