Lets start off with how inflation is calculated to give a frame of reference.
When calculating CPI, well documented flaws in the calculation methodology compromises the integrity of the data used. Changes in the measurements and values of the basket of goods used to determine pricing has resulted over time in a series of data creep having a cumulative effect of the reported statistics no longer matching with what is observed in reality.
These changes include Geometric Weighting, Hedonic Adjustment, and Substitution.
Substitution is where a government analyst might remove some item such as salmon, and replace it with say, catfish (hat tip to Chris Martenson). The items in the basket are picked at the pleasure of the person(s) determining the basket to reflect reality in prices for everyone.
This can be compared to the way an Index fund reports its view of value.
An Index fund is trying to match the performance value of a basket of items, however cannot ever accurately achieve this task. The fund manager is performing an iterative task where he is selling and buying instruments in a portfolio with the intention of matching a basket of items based on a spreadsheet decided upon by some analyst. The problem is, that as the Index changes, the fund manager must sell from his portfolio and add the new items in the index. The loss/gain on those trades is the delta from the actual Index performance if no trading were taking place. The cumulative effect over time is substantial creep from a base value measurement. The net result is just garbage data if one is trying to compare an investment in an Index Fund versus gold.
The second problem with trying to measure gold performance versus an Index Fund, is that the index itself is composed of a basket of arbitrarily decided items, it is not measuring a single item such as the USD gold price. Therefore, using it to compare performance with gold is an “apples to oranges” comparison. The comparison that is almost always used (I have never seen otherwise) focuses on USD / Gold as the trading pair. To be a fair comparison, the Index Fund performance, which we already know is questionable data for this purpose, should be compared to an Index of Gold in various currencies. The numbers used would have to be gold across a basket of currencies, and the “Gold Index” would have to allow for substitution of various currency pairs in the trading basket based on the whims of the Index Manager.
So for example, in 2014 I might drop USD/Gold from the basket and add EURO/Gold – this would clearly give a different performance value, and the cumulative effect so much more pronounced.
Comparing the USD gold price to an Index Fund is therefore disingenuous at worst, and naïve at best.
So the next time you hear someone parroting up this meme, keep this in mind.