Gold inflation hedge works well in India and Malaysia, but poorly in Singapore or Japan

By quantofasiaUncategorized

I have long said that gold is an ancient but outdated hedge against inflation.  Yes, in theory the amount of gold in the world is relatively fixed (we could discover new unknown gold or a cost-effective way to create it nuclear reactors) compared to the supply of fiat money, but in the short term (which for gold I would say is anything less than about 30 years) gold is simply too volatile to be useful as an inflation hedge.  In the US, inflation was more than 6% in 1969, 1975, and 1981, more than 3% in 1983, 1984, 1988, 1997, and perhaps in 2013, yet all 7 of those one-year periods (and again, perhaps 2013) saw the price of gold decline more than 15%.  For this and other reasons, as an inflation hedge I tend to prefer fixed income and FX strategies where real interest rates are positive and different kinds of real estate and commodity strategies where real interest rates are negative.

That said, Asia loves gold.  A short trip down almost any Hong Kong high street or Indian country road will equally give the impression that Asians may spend as much on gold as Americans do on cars, and that Asian jewellers are a very healthy base for global gold demand.  So then I had to look at the numbers and ask the question “Is gold just as good an inflation hedge in East Asia as in South Asia?”

The quick answer according to the chart below is “No – Gold was a far better inflation hedge in places like India or Malaysia than in places like Japan or Singapore”, at least if the inflation statistics in the IMF WEO database are to be trusted:  Real_Gold_USvAsia4I can’t think of any simple one-line explanation for this, other than the obvious one about real currency returns.  In Hong Kong dollars, for example, the real price of gold underperformed that in US dollars by 40% since 1983 even though their currencies have been tightly pegged during those 30 years, simple because inflation was that much higher in HK than in the US.  (Oddly enough, the US is where we here far more goldbugs decrying currency debasement.)  On the other hand, Thailand and Korea, who suffered steep devaluations in the 1997 crisis, saw the gold hedge work as well as it would have for India or Malaysia, while gold in real RMB terms would have performed as poorly as in yen or Sing dollars.

Even though India is where gold has worked best as an inflation hedge, there has been recent talk about trying to wean Indians off gold and get them to instead invest in inflation-indexed bonds.  It would of course be great to see inflation markets take off in Asia as they have so well developed in Latin America, such as with UDI in Mexico or UF in Chile.

Next I would like to get more data on all the different property markets in Asia to try and make a better comparison between gold, real estate, and other asset classes against inflation…

2 thoughts on “Gold inflation hedge works well in India and Malaysia, but poorly in Singapore or Japan”

  1. I imagine the explanation for the different performances might amount to the fact that there are “different kinds of inflation”. In advance, one probably does not know what source of inflation will be important. So, could it be that gold is a reasonable a prioiri choice ?

    1. Another way I would put it is simply “the price in gold of the basket of goods we use to measure inflation will vary and change at different rates in different places”. When I hear “different kinds of inflation”, that usually makes me think consumer vs producer prices, urban vs. rural consumers, etc., and of course there are different measures of inflation based on which basket of goods are chosen, and how the measure chooses to handle substitution, chaining, etc. Personally I think gold is a terrible choice maintained only because it worked well in ancient times before central banks – unlike other goods in the basket, you can’t eat it, live in it, ride it from place to place, make wearable clothing out of it, or use it for a majority of industrial purposes. I even consider the Big Mac index a slightly better measure, but you have inspired me to think of a simple “handy” inflation index that might be more usable and pedestrian than our mammoth CPIs, etc.

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