Gold Shows Real Inflation Rate Is High

Gold keeps hitting record highs. Here’s the graph, as I write, for the past five years:

The price is up to $2058.50 from $1251.30 on June 1, 2018. That’s an increase of $807 in just five years. Or 64.5%.

Here’s a better way to look at it. Flip it.

That shows the dollar’s decline in value against gold the past five years.

Here’s a way to look at it. There are two kinds of gold standards: an implicit gold standard and a monetary gold standard.

Implicit gold standard. That always exists, and has existed for millennia. If you find an old gold coin from 2,000 years ago and, ignoring the numismatic value, melt it down, you know the value immediately. Simply weigh it and look up the price of gold published in a newspaper or online. If the weight is one ounce, then today your gold would be worth $2058.80.

Monetary gold standard. This is where a currency is linked to gold – is “on the gold standard.” The link can be direct, as when the United States was on the gold standard (excepting only the Civil War) from its inception until 1971, when Nixon took us off gold. The historical prices are here.

Or the link can be indirect, as when we effectively were on gold at $350 an ounce from roughly 1981 until 1987. You can see that in this graph:

Note the huge spike in the price, from $35 (1934 to 1970) to more than $800 in 1980. Then it evens out at around $350 under President Reagan and Fed Chairman Volcker in the 1980s – an implicit monetary gold standard. In 1997, Fed Chairman Greenspan foolishly dropped gold too low, to around $250 (meaning the dollar became more valuable; it’s also called deflation) – another problem I’ll address in another day. (A strong dollar is a stable dollar, not one that goes up or down.)

Then Greenspan, panicking after 9/11/2001, goosed the dollar, as did his successor, Ben Bernanke (2006-14). Just look at the graph for that period. That was the real cause of the late 2000s Subprime Meltdown. Inflation always eventually causes a crash. After gold ran up to more than $1,800, it settled down to the $1200 level for a while, before going up to $1800 for a while until the current spike above $2000.

To make the dollar’s erosion against gold more clear, let’s flip that chart, too.

Shrinking Paychecks

This is the real reason your family paycheck doesn’t go as far as even a few years ago. Paychecks always lag on inflation calculators. The whole process – the gold/dollar ratio jumping around like that – also causes uncertainty. This is the main cause of the American standard of living declining so much the past 50 years. Until we went off gold, almost every man in America could support his wife and a bunch of kids on one salary. Few can now.

The fact is, everybody looks at the price of gold, including the Federal Reserve Board. If gold went from $2058.80 today to $200,000 in one year, what would that mean? It would mean the dollar lost almost all its value and we would be in hyperinflation.

This is why the Federal Reserve Board’s current interest-rate policy, going from 0% to 5.25% in a little over a year, is foolish. It’s not going to dampen inflation because inflation is caused by the Fed itself creating so much money it has eroded the dollar’s value, as shown in the charts above. It needs to create less money until gold goes back to the $1,800 average of recent years.

The recent hikes in interest rates have been excessive, and only have treated the symptoms of the disease the Fed itself caused – to wit, the creation of too much money as shown by the decline in the dollar’s value against gold.

Note 1: There’s also some commodities inflation from the disruptions of the Ukraine War. But the markets will even that out over the next several years, especially if the war ends and we have peace. There’s also the problem of countries moving away from the dollar in transactions; but that’s gradual, and could be handled by the Fed creating less money.

Note 2: Gold also is the only commodity that never has gone into what’s called “contango,” where the futures price is higher than the spot price. Some say that’s because gold is less a commodity than a “store of value.” It helps to think of gold not rising or falling against the dollar, but of it as the center around which the dollar and other currencies revolve.

Back to Gold

Finally, it looks like Russia and China might be creating a new quasi-gold standard based on a basket of commodities. If that happens, it will force the dollar, the euro, the pound and the yen to do the same, even if they don’t say so. Then the world will be back on the gold standard.

Gold always comes back. Because it’s the only real money and lasts millennia.