Not for the last 25 years, it isn’t. Long-time readers may recognize this as a theme of ours: markets generally reflect the present, and rarely divine the future. We’ve made this point concerning oil prices (which reflect, don’t lead supply and demand trends), fed funds futures (which predict next to nothing), and inflation-protected bonds (which reflect current inflation, and don’t anticipate it). And now we can add gold to the list of markets with undeserved reputations as seers.
As the graph below shows, gold did a pretty good job of anticipating moves in the CPI in the late 1970s and early 1980s, but since then the relationship has broken down. For example, the correlation coefficients for the yearly change in the gold price and the CPI during the 1974–84 period improve the further ahead you go—from 0.61 for the same month to 0.68 for a three-month lead on the CPI. They stay in the 0.67–0.68 range for leads of up to about a year (that is, gold anticipates moves in inflation). But if gold were really good at anticipating inflation, you’d expect a steeper gradient of improving correlations than just 0.07 point over the course of three months, followed by a flattening, wouldn’t you?
And after 1984, gold’s powers of prognostication collapse completely. Since 1985, the correlation coefficient for the yearly change in the gold price and the CPI is 0.01 for the same month, 0.00 with gold given a lead of three months, and –0.04 six months out. And the correlations remain slightly negative up to fifteen months out.
In fact, you could do far better in predicting future inflation just by drawing a straight line from current inflation. The correlation coefficient between the yearly inflation rate and the CPI three months out for the graph’s entire history is 0.96. As with gold, the 1974–84 experience pulls up the average; since then, the coefficient is 0.79 (lower, but still a lot better than gold). Six months out, it’s 0.58—not great, but still miles ahead of gold.
Clearly the 1974–84 period is special: a great acceleration in inflation followed by a great disinflation. Maybe we’re in for a rerun—though there are plenty of reasons why the present is very different from that past. One difference is the behavior of productivity and unit labor costs. Another is that the 1970s were the climax of a long wave of rising labor militancy. We’ve got nothing like that now.
That last point is underscored by the graph below, which shows the annual number of major strikes since 1947. Strikes actually do a better job of predicting inflation than gold does. The correlation coefficient between the yearly change in strikes and the next year’s inflation rate since 1985 is 0.18. If the experience of the first nine months of 2009 holds for the rest of the year, we’ll have four—count ‘em, four—work stoppages involving 1,000 workers or more this year. That will be an all-time record low since the BLS started tracking these figures in 1947. From 1947–79, we averaged 303 a year. For 2000–2008, the average was 22 a year. So far this year, we’re down by 90% from the decade average, and more than 99% from the 1947–79 average—and it’s hard to see strike activity picking up anytime soon.
So what is the current strength in gold telling us? That a lot of money has been racing into the metal. While much of that money probably belongs to investors who think we’re going to see a major pickup in inflation—and some of it to investors who want to get ahead of the spread of that perception, regardless of their own convictions—gold’s record as an inflation forecaster isn’t something to bank on.
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