Last week we told you that gold went up for a few different reasons: dovish comments from the Fed (“dovish” meaning suggestive of lower interest rates and less inflation concern), the increasing violence in Iraq, and the heightened conflict between Russia and Ukraine. Three things these items have in common are the gold price, inflation, and fossil fuels (in this case, oil and natural gas). Research analyst Cliff Wachtel explained the relationship between gold, oil, and inflation this morning on Seeking Alpha.
Gold, Oil, and Inflation – A Love Triangle
Oil, gold, and inflation have been rising and falling almost in sync since mid-2013. Oil is priced globally in U.S. dollars, so when inflation rises and the dollar devalues, crude oil costs more dollars to buy. And as we have pointed out many times before, when inflation rises, gold tends to rise as well. What we are left with is a positive correlation between gold, crude oil, and inflation. See the chart below, also from Seeking Alpha, to see the relationship:
We have spoken before about the relationship between oil and gold prices, but in this piece we are looking at the relationship between gold and inflation plus the relationship between oil and inflation. What gold and oil have in common is a relationship with inflation. And with both oil prices and inflation coming into play right now amid the recent Fed activity and the conflicts in Iraq and Russia/Ukraine, both gold and crude oil are worth paying attention to right now, considering their historical relationship with inflation.
But now for an even more intriguing question…
Is Gold Currently Undervalued?
It is impossible to say with certainty whether gold is undervalued right now, or if whatever it is being compared to is overvalued. However, two different charts should be taken into consideration when asking this question:
In each chart, we see that the items being compared were more closely correlated before 2014. After 2014, the vertical gaps between each line widen, meaning the correlation is not as strong. This may suggest that gold should be priced higher than it currently is.
There are many variables that can affect the value of gold, and past performance is not indicative of future results. However, if you find yourself asking if gold may be currently undervalued, the data presented in this post is worth considering.
Despite volatility in the gold price during the short term, gold has proven historically to be a reliable holder of value for many many years, no matter what may be happening in the world in terms of war or governmental monetary policy. It is never really “the right time” to buy gold – investors who wait for that time often never end up investing in gold at all. Gold’s function as a long-term store of value and protection of your purchasing power does not change on a day-to-day basis like its price does. And if you have a retirement plan such as a 401(k) or IRA, gold can protect those assets as well. Call American Bullion today at 1-800-326-9598 to speak with a precious metals specialist and get started on opening a Gold IRA.