Gold spot price: Overvalued long-term, sure, but what about mid-term?

on Nov 26, 2013
Updated: Oct 21, 2019

**, Tuesday 26 November:**

Although gold is generally perceived as an effective inflation hedge, the jury is still out on whether the precious metal can adequately protect investors against unexpected price increases. While returns of gold outpace the CPI over long periods, in reality equities do a much better job.
The widespread view that gold is an inflation hedge comes under attack in a recently-published research paper by Jonathan Batten, Cetin Ciner and Brian Lucey, university academics from Australia, the US and Ireland respectively, who question the conventional market wisdom and argue that gold is sometimes indifferent to inflation. The paper demonstrates that gold pricing lagged inflation in the 1990s, prompting the authors to conclude that “the gold-inflation relationship is not stable”.

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Speaking to the release, co-author Dr Cetin Ciner of the University of North Carolina, observed: “Gold sometimes is not sensitive to inflation at all, in times where markets believe that central banks have it under control.” The research established though that the price of the precious metal has had a strong link with inflation rates in the years since 2000.

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But how well does the metal fare against inflation? The above chart shows the spot price of gold as deflated by the US Fed’s favoured inflation metric, the Core Personal Consumption Expenditures Price Index.
As is apparent, gold topped in September 2011 when it marginally exceeded its prior inflation-adjusted peak. And whereas the current deflated price is nearly twice its long-term average (red line), gold’s inflation-adjusted price has recently slipped below its average from 2008 (green line).

Back in 1982, gold found a base even though it was still long-term overvalued but its deflated price was cheaper than the six-year average at the time, as it seems now.
Most experts are convinced in gold’s inherent flaws as an investment in a QE-free world that would see the metal priced well below current levels in the long-term. It may though be worth holding to an alternative argument in the medium-term. Financial markets are an imperfect system trying to seek equilibrium within an ever-changing world and long-term outcomes don’t preclude shorter-term deviations.

And, as the saying goes, past performance is no guarantee of future returns.
So far today, the price of gold has fluctuated within the range of $1245.25 to $1257.85. Right now, the precious metal is trading around $1246.75, up 0.41 percent intraday.
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Commodity Precious Metals