The most recent data has shown that the rate of inflation is 6.9% year-over-year in Canada. Although inflation decelerated for the third consecutive month, it is nowhere near sustainable levels. Therefore, it is generally anticipated that the Bank of Canada will implement another interest rate increase with its next policy rate announcement on October 26th.
With inflation in Canada currently sitting at decades-high levels, the debate has once again emerged as to whether gold acts as a suitable hedge strategy for Canadian investors against inflation.
Below is a data table displaying historical inflation rates in Canada from 1914 to 2020.
|Year||Yearly CPI||Yearly Inflation Rate|
The Correlation Between Gold and Inflation in Canada
From a historical perspective, economic analysis between gold and inflation goes back to August 1971, when then-President Richard Nixon’s economic policies canceled the U.S. dollar’s convertibility to gold.
Based upon research, historical evidence has shown that the correlation between gold and inflation no longer exists. For instance, a 2020 article published by the Canadian Investment Review outlines that from 1980 to 2016, the price of gold did not increase with the rise in consumer prices.
“From January 1980 to the beginning of 1985, inflation averaged 6.3% per year, while the nominal price of gold fell 55% and the real, inflation-adjusted price of gold fell 65%. And from August 2011 to August 2016, inflation averaged 1.2% per year and the nominal price of gold fell about 28%, while the real price of gold fell about 33%,” explained the article.
The Bank of Canada, Gold Prices, and Inflation
A paper published by the Bank of Canada examined gold prices and inflation. The 2007 study examined a period between 1994 and 2005 utilizing data from 14 different countries, including Canada.
“The role of gold as an inflation hedge may have diminished with the growth of the financial futures markets.” the Bank of Canada noted in its analysis.
Based upon research conducted by Canada’s central bank, Canadian investors shouldn’t solely rely on gold as a safe haven against high inflation, expecting high returns on the investment. Instead, a diversified portfolio that includes several asset classes, including precious metals, is a good investment strategy.
Additional Academic Analysis Between Inflation and Gold in Canada
The Bank of Canada is not the entity that has studied gold as a significant hedge against inflation. A 2021 study from the University of Malaysia, Gold and Inflation in Canada: A Time-Varying Perspective, researchers analyzed the role of gold as a safe haven against inflation, from a historical standpoint.
“We found that gold only plays a minor role as a hedge and safe haven against inflation since their returns do not evolve with the same rhythm as inflation. The rolling regression analysis, on the other hand, demonstrates that the incidents of refuge against purchasing power loss only occasionally occur at different times and not consistently across holding periods.
These findings indicate that gold does not have the ability to secure Canadian investment during high inflationary periods at all the times. Thus, Canadian investors should hold a well-diversified portfolio to earn sustainable return and protection from purchasing power loss,” explained the researchers in the study abstract.
Inflation and Gold: Conclusion
In December 2021, the Bank of Canada and the federal government renewed the monetary policy framework. From 2022 to 2026, the nation’s central bank renewed the inflation control target agreement.
“Under this agreement, the Bank will continue to conduct monetary policy aimed at keeping inflation—as measured by the 12-month rate of change in the consumer price index—at 2%, with an inflation-control range of 1% to 3%,” explained the Bank of Canada.
On October 19, 2022, Statistics Canada released the latest data on inflation and consumer prices. Although inflation in Canada decelerated slightly to 6.9% in September, compared to 7% year-over-year in August, that is still significantly higher than the Bank of Canada’s inflation-targeting framework of approximately 2%.
In essence, based upon historical analysis of data from a Canadian perspective, gold does not guarantee protection during inflationary periods. However, including a small percentage of gold and other precious metals in one’s portfolio is a good diversification strategy. Particularly, taking into account that historically stocks, bonds, and other paper assets have been far more negatively affected during inflationary periods than gold and silver. Therefore, an investment portfolio that is comprised predominantly of paper assets, is more at risk during periods of high inflation.
Canadian investors should always implement diversification as an effective investment strategy to protect themselves against economic volatility and inflation.
If you are interested in gaining more insight into how inflation is impacting the Canadian economy, here are our 2022 CPI and inflation rates for Canada. For additional information, here are the historical inflation rates in Canada from 1914 to 2020. Furthermore, try our inflation calculator, and subscribe to our newsletter.
If you want to learn how to buy gold in Canada as a way to diversify your portfolio, check out this article from MTL Times, which covers how to use an RRSP or TFSA to purchase gold tax-free and at low premiums over spot.