In the last 12 months, gold has fallen by 13 per cent in sterling terms. But official figures this week showed that UK consumer prices have risen by 2.8 per cent. This divergence is consistent with the long-run pattern for there to be no correlation between annual consumer price inflation and the annual return on gold in sterling. Since January 1989, the correlation between the two has been minus 0.06. This means gold is as likely to fall as to rise in times of above-average inflation.
Economists expect inflation to rise. It will, says Chris Williamson at research group Markit, "increase further in coming months". He believes the effect of the recent fall in oil prices will be offset by higher import prices following sterling's fall earlier this year, higher food prices, and rising tuition and utility bills. Most economists expect CPI inflation to hit around 3.5 per cent this summer. This means one of Mark Carney's first jobs when he becomes Bank governor in June will be to write to the chancellor to explain why inflation has continued to overshoot its target.
But some analysts think that, for once, gold might bounce back to offer some protection against this. Gary Dugan at Coutts describes the sell-off as "an exaggeration". He believes that although it might continue falling in the near term, buying by central banks in emerging markets should support its price in the longer term. He says a price of $1,250 an ounce would be "an attractive entry point".
Whatever its price gyrations, many believe that gold still has a place in balanced portfolios because it has low correlations with gilts and equities and so helps diversify risk. This hasn't altered in recent days; as gold has fallen, prices of gilts and many non-commodity shares have held up well. Gold also offers protection against any increase in general economic uncertainty. And Mr Dugan says it is also a hedge against currency devaluation and some types of political risk.
Gold offers protection against many things. It's just that UK inflation isn't one of them.
