Gold vs. the money supply

 

The fact that the U.S. dollar is hyper-inflating adds extra urgency to the case for adjusting the dollar price of gold to reflect monetary inflation. This leads us to the second chart, covering the price of gold rebased to January 2000, when the price was $283.

 

Since 2000 the quantity of aboveground gold stocks has increased from about 126,000 tonnes to 159,000 tonnes today, and the dollar component from $2.92 trillion to $11.3 trillion. Therefore, measured in January-2000 dollars the gold price today is under $400 at today’s price of $1,200. So instead of the gold/dollar exchange rate nominally rising by 324%, in real terms it has only risen by 39% in thirteen years.

For anyone trying to value gold as a hedge against banking and currency risks this knowledge is crucial. In real terms gold is at the level it was in April 2006, and below the levels seen during the banking crisis, yet the dollar on our measure is hyper-inflating.

Almost no one accounts for monetary inflation when evaluating the gold/dollar price, despite increasingly unstable monetary conditions. This is a mistake that will only be recognized by most people when prices eventually reflect today’s monetary inflation; but it offers a tremendous opportunity for those who understand the true relationship between gold and fiat currencies.

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About the Author
Alasdair Macleod

Alasdair Macleod is head of research for GoldMoney. He also runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. He has a background as a stockbroker, banker and economist. He can be contacted at Alasdair.Macleod@GMYF.org and followed on Twitter @MacleodFinance.

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