Silver & Gold’s Historical Correlations to High Inflation: This Answers Some Questions

Probably the biggest knock against gold and silver right now is that they’re not rising in response to spiking inflation.

This is what many investors know them for, after all. Yet despite the CPI—the Consumer Price Index that tracks price changes in everyday goods and services—reaching 40-year highs, gold and silver prices have been weak.

While there are a few valid reasons they’re stuck, is this really all we’re going to get out of them while inflation remains high?

Probably the most effective way to answer that question is to look at their behavior the last time the CPI soared.

So that’s what I did—and I uncovered some interesting info you might find useful…

Gold and Silver Prices in the Last Inflation Era

I wanted to look at the specific relationship between gold and silver relative to the CPI, to determine how tied they were during periods of high inflation, and in particular if they moved in lockstep (or not).

This chart shows the monthly CPI reading for the entire 1970s decade. This was the last time inflation was “officially” as high as it is now, as well as the period of gold and silver’s biggest gains in history (for you chart nerds, we used a monthly metal price).

See what general trends you might spot…

You can see the CPI fell from 1970 through 1972, yet the gold price rose. Not exactly a perfect correlation, though gold rose by roughly 3x when inflation spiked into the mid-1970s.

But the thing that stuck out to me was what happened in the latter half of the 1970s:

  • Gold rose when the CPI started climbing again in 1977, but its big spike didn’t kick in until a full year after that climb started.

In other words, while there were a number of factors pushing and pulling on the price at the time, there was a delay in gold’s response to inflation jumping higher again.

I wonder if some investors then too, were puzzled by gold’s lack of zip in response to the higher CPI. I hope some of them held on.

Here’s how silver responded to the CPI during the same period.

As is typical of silver’s lag, its big spike in 1979 didn’t start until two years after inflation began climbing again in 1977.

This data is actually reassuring. It tells us that gold and especially silver did not always immediately spike in price when inflation did. But they sure caught up.

Correlation Coefficients

I took it one step further and looked at the “correlation coefficient” between the CPI and each metal. This is simply a statistical measure of the strength of the relationship between the two (the closer to 1.0 the stronger the correlation).

Gold and silver prices moved around a lot during those 10 years, so I divided the decade into three periods:

  • The bull run from 1970 to 1974
  • The bear selloff from 1974 to 1976
  • The second bull run from 1976 into the January 1980 peak.

Here is gold’s correlation to the CPI during each of those periods.

Gold has a strong correlation to inflation, both up and down. In fact, you can see its strongest correlation occurred when both of them were falling in the mid-1970s.

Silver’s correlation to the CPI is slightly different.

Silver had a very strong correlation to the CPI in the first period, a weak and almost non-existent correlation in the middle of the decade, and a strong but not perfect correlation in the latter years.

A Good but Imperfect Marriage

While there is a strong correlation between gold and silver and official inflation numbers, it’s not axiomatic. And there is history that shows there can be a delay in their response to higher readings.

We also have to keep in mind that many factors can and do impact their prices, not just inflation. There are many key reasons we own gold.

The good news is, there probably isn’t a single better asset to own in the current environment. It stands poised to offer both protection and profit going forward.

With all the arrows being shot at our portfolio right now, physical gold can take all comers. Including if inflation remains elevated or even spikes again.

An accomplished analyst, author, and speaker, Jeff Clark is a globally recognized authority on precious metals. The son of an award-winning gold panner, with family owned mining claims in California, Arizona, and Nevada, Jeff has deep roots in the industry. An active investor with a love of writing, Jeff has spent decades as metals and mining industry analyst, including 10 years as senior editor for the world-renowned publication BIG GOLD. He regularly speaks at investment and industry conferences, including Cambridge House and the Silver Summit, among others. He also serves on the board at Strategic Wealth Preservation of Grand Cayman. And, Jeff provides regular analysis and market commentary to Hard Assets Alliance customers. Follow him on Twitter @TheGoldAdvisor.