Over the past two weeks, we have seen a roughly 5% rise in the price of gold (XAU, SPTGLD). A chart like this is quite impressive:

Spot Gold vs. US Dollar, One Month

(Click on image to enlarge)

Source: Bloomberg

It is quite clear that a trader who went long gold earlier this month would be quite pleased. Interestingly, over the past month, gold has kept pace almost perfectly with the S&P 500 Index (SPX) and even Bitcoin. In fact, as the chart below shows, XAU is the best performer of the three during that period:

One Month Normalized Chart, XAU (white), SPX (blue), Bitcoin (red)

(Click on image to enlarge)

Source: Bloomberg

Bitcoin, or “digital gold” to some, has clearly been much more volatile, but after some wild twists and turns – including an all-time high – it has actually performed slightly worse than either gold or the SPX over the past month. 

The prima facie explanation for gold’s recent reawakening is an obvious one – inflation is back, and gold is the classic inflation hedge. I’m sorry, but while I believe that explains the yellow metal’s resurgence over the past two weeks, it fails to explain why gold has underperformed for the past year and is only catching up now. A year-to-date chart that also includes the Commodity Research Bureau BLS/US Spot All Commodities Index (CRB) as a proxy for inflation shows a vastly different picture:

Year-To-Date Normalized Chart, XAU (white), SPX (blue), Bitcoin (red), CRB (purple)

(Click on image to enlarge)

Source: Bloomberg

There are a few interesting findings amidst this chart. First, while some can assert that bitcoin is a hedge against inflation, it is far too volatile to be a hedge, especially when it has the inconvenient pattern of rising and falling at different times than an inflation proxy. Second, it appears that gold and SPX have been moving in relative lockstep for the past 3 months, not just the past month. Gold was falling early this year while stocks were rising and the metal has been unable to recoup that early underperformance. The following chart displays the similarity more clearly:

Three Month Normalized Chart, XAU (white), SPX (blue), CRB (purple)

(Click on image to enlarge)

Source: Bloomberg

Yet the most interesting finding from the year-to-date chart may be that the best hedge for commodity price inflation this year has been the S&P 500. Remember that the year-to-date chart showed a 24.8% rise in SPX, which kept a pretty good pace with the 28.5% rise in CRB. More importantly, the moves were more or less synchronous, as the chart below demonstrates more clearly:

Year-To-Date Normalized Chart, XAU (white), SPX (blue), CRB (purple)

(Click on image to enlarge)

Source: Bloomberg

It seems fair to assert that stocks have been the better hedge for commodity price inflation than gold. While inflation statistics like the Consumer Price Index (CPI) contain factors like housing and services that are not encompassed by the CRB Index, one can’t explicitly trade government statistics. That is why many traders prefer to use a commodity price measure like CRB as a proxy. 

Inflation is a monetary phenomenon. It is literally what occurs when too much money chases too few goods. Global central banks have been extraordinarily accommodative since last year’s Covid crisis. Many attribute that accommodation to be a reason why both asset and “real-world” prices have soared. I believe that the relatively similar performance between commodity and stock prices is yet another example of the monetary phenomenon at work. It is not clear why gold has been so slow to react – it could be that its place in traders’ mindsets has been usurped by cryptocurrencies – but it does show that until recently gold has been a fairly lousy inflation hedge.

There is a scary potential takeaway though. If both stocks and commodities have been rising largely because of monetary accommodation, it doesn’t bode well for stocks if the Federal Reserve and other central banks reduce and even reverse that accommodation to fight inflation. For now, the Fed seems committed only to slowing the pace of accommodation. Going forward, there is a divergence of opinion.If markets begin to price in a wave of central bank tightening, the hedge might work in the opposite direction.