Gold as an Inflation Hedge
This is a continuation of a series dealilng with the question: What is gold worth? The first blog I looked at the so-called Shadow Price of Gold and concluded that it is not a terribly good predictor of the price of gold. To the extent that it is, is due to the fact that M0 (the monetary base) is correlated with the price of gold.
There are fundamentally two ways to define inflation.
1) An increase in the money supply.
2) An increase in the price level.
We'll briefly look at both.
Gold and the money supply
There are a few ways to measure the money supply. One is the monetary base or M0 which turns out to have a nice correlation with the price of gold.
As can be seen there is a decent linear relationship between the price of gold and the monetary base. I included a zero intercept line which, although it does not fit as well, there are theoretical reasons why it ought to. The interesting thing is that the zero interecept line suggests that gold is fairly valued presently.
Gold and CPI
There is also a nice relationship between gold and CPI.
Although the power law was a slightly better fit than linear, the relationship is almost linear.
This model suggests that gold is substantially overpriced right now.
Looking at both money supply and consumer prices, it appears there is a nice correlation between the price of gold and inflation. There are, however, some concerns I have with using gold as an inflation hedge. But I will leave that for another post.