the unstable gold-stock relationship
DESCRIPTION
Is there a relationship between gold and the stock price? One might expect an inverse correlation: When stock goes up, investors make more money at the stock market and thus sell their gold. This drives then the gold price down. However, data tell us otherwise ...TRANSCRIPT
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Gold Inflation
Relationship:
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1. Conventional wisdom suggests that there is a
strong correlation between gold and inflation
2. When inflation goes up, gold follows suit. Likewise, a drop in inflation would lead to a fall in
the gold price 3. This is because in times of high
inflation, gold becomes a better option for investors
4. But this is wrong
GOLD INFLATION RELATIONSHIP
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1. Let’s look at three charts 2. They track the gold price in US$ per ounce and the monthly
US Consumer Price Index, which is a gauge for inflation
3. The first chart goes from 1974 until 1980 which was a bull
market for gold4. The second chart shows the 21-
year bear market from 1980 to 2001
5. On the last chart, the current bull market is seen, which
stated in 2001
GOLD INFLATION RELATIONSHIP
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1. Fact 1: Bull Market2. 1974 until January 1980, gold
went up from US$ 129 (monthly averages) to US$ 675 per ounce
at the end of the period3. This is an increase of 353%4. During the same time, the
consumer price index, a measure of inflation increased
by 67%5. Here, gold strongly outpaces
the inflation development
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• Fact 2: Bear Market• Between 1980 and April 2001,
gold went down from US$ 675 to US$ 260 per ounce, which is
a decrease of 67%• In contrast, the consumer price
index increased during the same period by around 126%
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1. Fact 3: Bull Market2. From 2001 to February 2011,
the gold rate experienced huge gains of 527 per cent
3. The overall inflation rate was only 25 per cent
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1. Especially remarkable is the inflation decrease in the middle
of 20082. If the theory of a positive correlation held true, the gold
price would also go down3. But the opposite was the case:
inflation went down, and gold went up
4. This rather points to an inverse correlation between gold and
inflation
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All of this points towards a weak or even non-existing
relationship between the gold price and the inflation rate
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What do others say about a possible correlation?
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1. First, the Wall Street Journal commissioned a study from the
research firm Ibbotson Associates
2. According to their research, between 1978 and 2010 gold and the inflation rate have a
correlation value of 0.083. This is nearly no correlation (on
a scale ranging from -1 to 1, where 1 is perfect correlation,
and -1 perfect negative correlation, and zero is the absence of a relationship)
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1. Second, also Citibank comes in 2009 to the conclusion that
“there is no obvious relationship between the gold
price and inflation”2. Sometimes the development of
gold follows inflation, at other times there is an inverse trend or just on obvious pattern at all
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Therefore, it can be concluded that there is no, or only a weak, relationship between the gold
rate and inflation levels
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