Gold, Commodities, And The Inflationary Bogeyman

We have previously written about how gold has been failing as a hedge against inflationary worries for the past few months and has instead functioned more as an anti-USD during that time. After a recent appearance on Australian TV and ahead of a webinar in Canada, I have been digging deeper into the relationship of those commodity-dependent currencies to gold and inflation as well. While the Australian and Canadian dollars have been showing relative strength versus their US counterpart, even they have failed to keep pace with skyrocketing commodities prices.

The chart below is complex, but it illustrates that while there are similarities among the price movements in gold, the US dollar, the CRB Index, and the Australian and Canadian dollars, the relationships are far from iron-clad.

GLD (candles), Australian Dollar (blue), Canadian Dollar (inverted, red), DXY (yellow), CRB (purple)

GLD (candles), Australian Dollar (blue), Canadian Dollar (inverted, red), DXY (yellow), CRB (purple)

Source: Bloomberg

First, we can see the largely inverse price action between the price of SPDR Gold Shares (GLD) and the US Dollar Index (DXY). As the candles representing GLD rise, the yellow line representing DXY falls, and vice versa. That is to be expected, to an extent. If the dollar strengthens, fewer are required to buy a fixed amount of gold. That is the same for any commodity – at least in theory, and as long as supply and demand for that commodity remains largely stable. Yet we see the Commodities Research Bureau Spot All Commodities Index (CRB) climbing at a much faster pace than DXY. It should surprise no one that the perception of a rapidly improving global economy would increase demand for the commodities that are required to build that economy and satisfy consumer demand. Copper, lumber, and oil are just three examples of commodities that have seen significant price bounces off of pandemic low levels. If we’re building houses or traveling more, we need more of those commodities. Now consider whether more demand for gold has been created. I will assert that any incremental demand for gold is quite minimal compared to the incremental demand for a wide range of commodities. Hence gold’s failure to act as a meaningful inflation hedge.

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