Gold is a very misunderstood asset, and this is no more apparent than in the widespread notion that gold is a hedge against inflation. Now don't get me wrong, I am one of the biggest gold bugs out there, but the data just doesn't support the argument that gold is a hedge against inflation.
If there is a large increase in inflation as evidenced by the CPI, then yes gold will probably rise. But gold was never an asset that tracked inflation on a month-to-month or even year-to-year basis. Even on a money supply basis (for the purists out there), gold sometimes acts as a horrible hedge against inflation. For example, M3 money supply from 1981 to 2000 increased by over 200%. Not only didn't gold rise by 200%, it actually fell. In 1981 gold stood at $600; going into 2000, gold was $300. Inflation hedge?
M3 Money Supply 1981-2000
click to enlarge
I can guarantee that the majority of people who make the claim that gold is an inflation hedge have never looked at the data. Imagine you were a retiree in 1980 looking to protect yourself against inflation. If you were to accept conventional wisdom and bought gold to hedge against inflation, your retirement would have been a nightmare. Understanding gold is not a trifling matter especially with so many retiring Boomers looking to protect their assets from inflation.
The reason I am very bullish on gold is because of the obvious debt problems we face. The truly monster spikes in gold are going to come because of sovereign debt defaults. Debt crises send capital flocking in and out of currencies and into gold. During the Great Depression, no currency was safe because sovereign default concerns were prevalent. No matter what the naysayers say about gold having no value, the fact remains that people still flock to it when there is a crisis.
For those who are invested in gold to hedge against inflation, I would caution you to redirect your attention to the debt crisis. If the government were to enact proper measures to stop the rise in debt, then gold would eventually collapse in value even with steady year-to-year inflation. If this were to occur, I personally would transfer my gold holdings to real estate, which is a far better inflation hedge than gold. Focus on government stupidity and their head-in-the-sand brand of economics. This is what is going to send gold flying.
Additional disclosure: Long gold