Gold's Inflation Link Breaks Down as ETF Flows Take Centre Stage
The long-held reputation of gold as a hedge against inflation may be misplaced. Historically, gold prices have increased during periods of high inflation, but recent data suggests that this correlation has weakened over time. According to one model, the price of gold is influenced by factors such as the US dollar, real yields, and ETF flows. However, after 2021, this model's factor weights changed significantly, with real yields flipping direction and ETF flows becoming a much bigger influence.
The Canadian Gold Index (TSX Gold Sub Industry Index) has been driven up by strong earnings growth, but its valuation is still compelling, with a price-to-earnings ratio of 13.6x. Earnings are forecast to grow by 21% in the next year, making it an attractive investment option.
Gold's reputation as a safe-haven asset has also been called into question, as it did not perform well during times of market stress earlier this year. However, its diversification benefits remain a key advantage, particularly in times of high debt risks.