What historical data says about Inflation Vs Gold Price.

 Are you born in India? Then you may know the importance of gold better than any star rated college graduates, analysts in the world, isn't it?

We hear from our elders to invest in gold, save in gold, gold never loses value. Is it really true?

Gold has become an integral part of life of majority Indians. Be it a marriage, birthday or some of the festivals. Gold is gifted, bought and traded. Gold is considered as sign of wealth, a medium of showcasing richness, even as a security to pledge when we need some cash. Gold is status symbol. It has been in our of our lives since centuries.

Since the ancient times the gold made men to reach the depths of the world. Here is just a list of current top 5 gold mines around the world.

Name of Mine	Production (‘000 ounces)	Country
Muruntau mine	2,000	Uzbekistan
Carlin Trend	1,665	USA
Olimpiada Mine	1,200	Russia
Pueblo Viejo Mine	903	Dominican Republic
Grasberg Mine	848	Indonesia

Source wikipedia

Gold is one of the commodity traded in major markets in the world. It is used in the form of bars, coins, biscuits, Jewellery as investment. India has its own version of Digital Gold in the form of Sovereign Gold Bonds. Its Shiny, metallic and can be melted to turn into another shape. But the attractive factor it doesn’t rust, corrode or decay. It will not lose its value by passing of time or reduce its quality. On the other hand the price of gold increases every year.

Researchers show that gold is Hedge against inflation. They recommend gold as one of the component to be in the portfolio along with equity, debt or any other asset classes.

Inflation Vs Gold:

Here is a chart showing how gold price and inflation has been over the years. Based on the data available, we see that whenever there is a spike in inflation the gold prices are pushed higher at a higher rate. We also see drops whenever there is a steady controlled inflation.

 

If we look at 1974 the inflation was at all time high of 28.6%, the gold prices were increased from Rs. 278.50 to Rs. 506.00. A whopping 81% YoY increase! A similar trend is seen when inflation went higher during 1992, 2008-2011 and recently in 2020 - 2021.

We can see a clear view of Inflation Vs YoY Gold Price Increase in below chart.

The YoY price increase is clearly in tandem with inflation. Whenever inflation went higher, gold prices rose at a similar trend.

Lets see how Rs. 100 invested in 1964 and the value of Rs. 100 in same year looks over the years.

For a better view the chart is created at a log scale. We can see a clear relation between inflation and gold rate. Rs. 100 invested in 1964 in gold and depreciation on the value of rupee went hand in hand last 58 years.

With the above comparisons we can conclude that, even if the we see a series of changes in gold price based on seasonality, demand in the domestic market or the save it in gold mentality, in the long range the Gold is always pegged against inflation rate.

This analysis may not hold true if gold is bought in the form of Jewellery where making charges, service charges etc are added while purchasing. There are many other options where one can buy gold in the form of coins, bars or in the digital form. As an investment perspective one can also look at digital form of gold which is considered more safer as there is no storage cost and risk is involved. Some of the digital forms are Gold ETFs, Gold Mutual Funds or Sovereign Gold Bonds which also pays an additional interest on the amount invested. To conclude, it is fair to say gold is safest hedge against inflation or protecting the value of money giving you returns that equates the rupee value depreciation. 

Note: Views presented are personal and do not advice any action for the readers. Please contact your financial advisors before making any decisions which better suites your investment style and portfolio mix.