Gold's Inflation Correlation Weakened as ETF Flows Take Center Stage

The relationship between gold and inflation is often seen as straightforward: when inflation rises, so does the price of gold. However, this correlation has been weakening over time.

A model that successfully predicted gold prices for nearly two decades lost its accuracy after 2021. Rebuilding the model with the same input factors showed a different weighting of influences, with ETF flows becoming a more significant factor.

The Canadian Gold Index, which is heavily weighted in the TSX Composite, has seen strong earnings growth but still trades at a relatively low P/E ratio. The authors remain constructive on gold miners and bullion, but caution that prices may be stretched after recent gains.

Bitcoin, often referred to as 'new gold' or 'digital gold', is not seen as a direct substitute for gold. Instead, it offers a unique performance profile with different volatility characteristics. A model built by the authors attempts to capture rising or falling demand/interest in Bitcoin by tracking ETF fund flows.