Gold and Inflation?

Gold goes up in inflation, this one seems so obvious. The central bank or Government print money (bonds, notes), prices for things go up in response and as a result of this inflation gold prices must go up. Gold price rise with inflation is it a myth or truth? Let us look at history of gold prices.

Inflation occurred almost nonstop after great depression, yet gold prices hardly moved till 1970. Yes the gold prices were fixed by the government but market forces are bigger than government. Gold prices rose from 1970 to 1980 and consensus was gold is catching up to the inflation and predicted gold to continue to rise with inflation. Gold lost close to 80 % value between 1980 to 2000 whereas inflation continued for this period. Gold rose close to 400 % from 2000 to 2010 and this decade was a deflationary decade.

Let’s summarize the numbers

1930 - 1970 – Relentless inflation – No change in gold prices

1970 – 1980 - High inflation – Gold prices soared

1980 – 2000 – Nonstop inflation – Gold lost 80% of its value

2000 – 2010 – Deflation – Gold gains close to 400 %.

Gold prices go up in inflation, Myth or Truth?

This is not to say that the gold prices won’t rise or fall, it will do what it has to do but the question is, is it because of inflation?

Let's examine current GLD daily chart (Gold ETF)

We see divergences, it has failed 3 times at the similar price level, maybe triple top? If it breaks drawn support line and 50 DMA which coincidentally is same as support line, we can see some down movement. In the interest of full disclosure, we do have a position in GLL (which is inverse of GLD), we took this position after it failed at the 2nd top.

We also sold our EXPE today for a small gain. Market direction is not clear yet. Some of the charts have started showing topping signs, we will have wait for more confirmation.