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Sunday, January 19, 2014

If gold is an inflation hedge, what does that really mean?

So according to Wall Street Whitey, gold is an inflation hedge. If the US sees a whole pile of inflation, Whitey says, the price of gold will go up. And Whitey also apparently thinks it's a hedge against economic or political chaos, and so on.

Because I dunno, gold is real money or some such bullshit.

So let me show you some charts.

Horrible, eh? Gold in USD has dropped something like 40% in the past year. Real rates are rising, inflation is nonexistent, and thus gold has performed badly.

In fact, gold is a dead investment. When something has gone down 40% in a year, that obviously means its secular bull market is over.


Are you sure?

OK, here's the problem. Total Q3 2013 US gold demand (I'll use Q3 just because it's post-gold-crash and because it's the first data I pulled up) was 43 tonnes, according to the World Gold Council. This is only 6% of world gross consumer demand. As I keep telling Whitey, you have nothing to do with gold anymore. Gold is no longer yours.

So why should we care about the gold price relative to US inflation?

Let's look at the gold price in some other countries, and you'll get my point.

First, Turkey. Their inflation rate was between 6-9% through 2013, they're going through a bit of political turmoil right now, and here's their 2013 gold chart:

Hey! Not such a bad chart, especially since the April drop. Seems like gold has been a very good hedge for the Turks, no? It's only down around 8% on the year. Gee whiz, you mean gold actually works as a hedge against inflation and political chaos in Turkey?

Guess what? Turkey's gold demand is roughly equal to that of the US. In Q3 2013, consumer demand was 47.7 tonnes.

That's 10% higher than US consumer demand for the same quarter, by the way: this goes to my "Whitey has nothing to do with gold" point, above.

So I guess if "gold is a hedge against inflation", or maybe "gold is a hedge against currency collapse" or "gold is a hedge against political chaos", then maybe you want to look at the inflation/currency/political situation in countries that actually fucking buy gold.

How about the big one? India?

Their inflation rate this last year has bounced around 10-12%. Also, the rupee has been hammered this year. And WGC estimates their Q3 demand at 148.2 tonnes. I wonder how gold's behaved in rupees?

Doing the math in my head here... it looks like it's down around 13% or so?

That's not exactly a broken investment, is it? Especially not for a country whose people buy four times the gold that Americans buy.

Next, Russia. Q3 2013 consumer demand was only 18.4 tonnes, half that of the US. I guess we're leaving central bank demand out of the story entirely, and I'd also assume that a lot of "Russians" are buying gold in other countries like Cyprus and Turkey and Spain and England, where they actually live launder their money. In any case, I wonder how gold has done in rubles?

Well, down something like 15%. And still in a definite downward channel. Still, that's not as bad as the US. Been a pretty good hedge for a country whose economy is collapsing, now that nobody wants their oil and gas. Inflation in Russia has been bouncing around 6-7.5% for the past year, and things don't look so good looking ahead.

So who's next?

OK, since Thailand's Q3 2013 gold demand was almost as high as the USA's (35.6 tonnes), let's look at gold in baht:

So gold is down 18% in Thailand over the last year. Not as good as the other countries, but still not as bad as the US, is it? An 18% decline certainly doesn't indicate the end of a secular bull, does it?

Thailand's 2013 inflation was only 2.18%. Then again, they're going through a bit of political chaos, so you might expect them to want to stock up on gold.

By the way.

Note that all these charts show gold over the last year.

That's important, because through 2013 Wall Street Whitey sold 870 tons of gold out of ETPs. Considering estimated consumer demand of roughly 3500 tonnes, that's something like a 25% oversupply that these consumers had to mop up (if you ignore State central bank demand, which I do cos who the hell knows what China's really doing right now).

To me, it's impressive that a commodity that saw a 25% spurt of oversupply in the past year still went down less than 25% in baht, rubles, rupees and lira.

Of course, if gold continued to see a 25% oversupply for the next several years, you might expect its chart to continue to suck in the countries that actually buy gold.

But Whitey's pretty much done selling all his gold, now, isn't he? They'd have to break open their central bank vaults to keep downward pressure on supply/demand.

In sum, if Whitey wants to continue arrogantly asserting that he's right about gold, and that gold is an inflation hedge, or a hedge against economic uncertainty, or a hedge against currency collapse, then he might want to re-interpret his narrative in light of the fact that gold is going to do its magical hedging in the currencies of countries that actually buy gold.

I guess that doesn't necessarily mean that gold in USD goes up from here; gold can continue going down in USD as EM currencies collapse.

But at least Whitey can stop the idiotic blather about moves in the gold price indicating anything whatsoever in US (or UK or EU) terms. Gold today is not the gold of even ten years ago; demand has shifted heavily into the EMs as net EM wealth has increased over the past decade.

I'd really love to see people clue in to this.

Especially the financial media.

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