Gold and Inflation woes!

Posted On Monday, Apr 19, 2010


Rising prices (also known as "inflation" in financial jargon) has been a big worry, more so since this escalation in prices is unmatched by income growth, making it difficult for the common man to make ends meet. Take a look at the numbers: As reported on Bloomberg, Wholesale Price Inflation rose +9.90% in March while the more concerning Consumer Price Inflation which affects all of us is as high as +16% reported as of January (it is released with a lag).

Food commodity prices are the main reason behind the continuing high inflation figures. An index measuring wholesale prices of lentils, rice, vegetables and other food articles compiled by the commerce ministry rose 17.22% in the week ended April 03 from a year earlier. Tragic but true - food prices in India have stayed above 15% since November.

All of us have witnessed food prices increase over time, making us spend more for the same amount of food grains and other items we consume. Simply put, the rupee that we hold has been able to buy us less quantity over time, indicating a loss of purchasing power.

Historically, gold has been an excellent inflation hedge. Even in recent times of rampant inflation, gold provides evidence of being an ideal inflation hedge, proving to be more effective than holding currencies which tend to loose purchasing power over time.

Here`s the evidence...

Even now, gold tends to buy more of food grains than in the past.

An ounce of gold today buys more of Wheat than ever before...
Quantum Mutual Fund_An ounce of gold today buys more of Wheat than ever before...
Source: Bloomberg

An ounce of gold today buys more of Rice than ever before...
Quantum Mutual Fund_An ounce of gold today buys more of Rice than ever before...
Source: Bloomberg

(Note: In the above charts, international commodity prices are converted to Indian Rupees using the exchange rate)

Your money buys you less of food grains than it used to do, but that’s not the case with gold, infact it’s just the opposite - today gold buys you more food grains than ever before.

This undoubtedly proves gold to be an excellent inflation hedge.

It doesn’t end here though. The inflationary forces are likely here to stay. The enormous amount of money doled out by central bankers as an effort to stem the crisis will likely be inflationary down the road, and increases in monetary base seem to testify the same. All said and done, it looks like it’s only a matter of time before we see a further run away increase in price levels on a global scale.

In such a scenario, an allocation of 15-20% to gold would be an excellent inflation hedge. In addition gold could also act as an effective portfolio diversifier, minimizing your losses in case another wave of financial crisis affects your portfolio.

Click here to invest in the Quantum Gold Fund ETF


The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

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