Why Ben Bernanke's QE Is No Stimulus for Gold

NEW YORK (TheStreet) -- With gold's big decline over the last two years, many may be searching for answers about what's to come. And suggestions abound -- some hinging on the notion gold can protect your portfolio from inflation.

In an environment where many fear quantitative easing (QE) will drive inflation higher, it's not surprising to hear gold bugs offer similar advice: Don't sell -- hang on and profit when QE-driven inflation increases gold's value. In our opinion, however, there are severe problems with this thesis. Here are two key ones: Quantitative easing isn't inflationary, it's dis- or deflationary, and gold isn't a reliable hedge against inflation.

For starters, QE has existed for nearly five years, and inflation's been nothing more than sluggish. The Federal Reserve may be buying bonds and adding to banks' excess reserves, but that money isn't going anywhere, as you can see in Exhibit 1.

Inflation can't rise on money supply alone. It needs velocity to send prices higher. But thanks to QE, the yield curve has flattened -- stifling loan growth, thereby reducing velocity. A flatter yield curve makes lending long-term less profitable.

So, when choosing between a relatively risky endeavor with little reward or storing savings safely at a tiny gain, banks are disincentivized to lend. Less, not more, QE would fix this. As long as reserves created through QE sit on the deposit at the Fed rather than coursing through the economy, inflation will likely remain on its current low, slow trajectory.

Even if inflation did rise, though, gold still wouldn't be an investor's saving grace. Simply, gold isn't a hugely effective inflation hedge. If it were, then it would always (or at least, the vast majority of the time) move with inflation -- but it hasn't.

Throughout the 1990s, gold fell while inflation rose, leaving those invested in the shiny metal missing out (Exhibit 2). Of course, gold did extremely well in the 2000s, but inflation was low -- very low, by historical standards.

Now, maybe you argue inflation is understated in the government's measures. We don't totally disagree. But realistically, that makes gold look worse historically as a hedge, not better.