Hedge Asset Prices Don’t Predict Inflation, Says BOE Analyst

Updated by Kyle Baird
In Brief
  • Analysts for the Bank of England say gold prices are a bad indicator of future inflation.
  • Hedge asset prices have risen as investors have feared losing returns to inflationary pressure.
  • The BOE analysts also suggested the UK economy may not recover for a number of years.
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The price of gold and other store-of-value assets are not good indicators of inflation, according to one Bank of England (BOE) analyst. Gertjan Vlieghe, previously a Deutsche Bank AG bond expert, told officials that elevated gold prices do not offer a predictive capability.

The testimony came as members of England’s central bank were called as witnesses before the Treasury select committee of MPs. The group is studying the impact of COVID-19 on the economy to determine future stimulus measures.

Hedge Assets’ Meteoric Rise

Gold prices have recently risen to new all-time high levels, crossing above $2,000 in early August. Since that time, the price has retreated moderately, settling just under $1,950 per ounce.

However, given that the precious metal began the year at $1,250, the current pricing reveals just how much fear is in the market. Investors generally move into hedge positions like gold when they believe inflation could wipe out interest and returns on other investments.

XAU/USD Chart by TradingView

Bitcoin, which began the year around $7,000, is now trading near $11,400 after following gold’s lead. Even with a substantial setback during March, Bitcoin has seen investors flock to it, seeking to hedge against the inflation of fiat currencies.

BTC/USD Chart by TradingView

However, as with gold, Bitcoin has struggled to maintain its recent highs. As markets have begun to dig out of the COVID-19 crisis, investors have seemed willing to move back into riskier positions.

Reflector or Predictor?

Vlieghe’s position is that these asset increases and decreases are not a predictor of future inflation. Instead, they represent a reflector of investors’ sentiment regarding the potential for inflation.

When stimulus checks and liquidity pumped into the market, investors saw this activity as a certain guarantee of future inflation. Even the Federal Reserve’s recent policy shift sent investors scurrying out of inflation-sensitive positions.

Nevertheless, these actions simply reflect fear in the market, rather than predicting where the market will go in future trading. For that type of analysis, investor sentiment is not always a helpful tool.

The testimony also revealed that the U.K.’s gross domestic product (GDP) will likely fall at least 9.5% this year. The BOE team believes the British economy will require several years to recover back to pre-COVID levels.


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