Inflation & gold
Guido reckons double-digit inflation is coming, and says: “If you haven’t got any gold, stock up on baked beans.”Now, as Giles points out, inferring that we have an inflation problem because of this week’s figures is just silly. And as I’ve said - along with MPC member Adam Posen (pdf)- there’s no reason to suppose that printing money, at least on the scale we’ve seen so far, will add much to inflation. But let’s leave this aside, and assume Guido’s premise is right. This raises another issue: does gold really protect us against inflation?My chart suggests maybe not. It shows annual changes in the gold price (in sterling terms) and annual inflation. You can see that high inflation is not always associated with good returns on gold. The gold price soared when inflation was high in 1980 (just before my chart begins), but it fell in 1981 when inflation was above 10%, and it plummeted in 1990-91, as inflation spiked up.Yes, the correlation between annual changes in gold and the RPIX inflation rate has been positive since 1980: 0.29, R-squared = 8.3%. But this is entirely because of the 1980 experience. Looking at the data since January 1981, the correlation is negative.One reason for this is simply that the gold price is astonishingly noisy. Another reason is that if global inflation rises, the world’s central bankers could reverse their slack monetary policies, causing gold to fall.Now, I say this not to take a view on where gold’s going. I’m just saying that fears about inflation are not sufficient to generate a bullish view of the metal. Another thing. Guido says he’ll “bet a large amount of money that the Governor of the Bank of England will have to write to Chancellor Osborne next year telling him why inflation is over-shooting target.” He’ll not get great odds. The Bank itself thinks there’s a 36% chance of inflation topping 3% in Q1, and a 25% chance of it doing so in Q2.