Gold price rising, or dollar falling?

If only the price of gold was rising, then news headlines should say “Gold price rising.” And we would want to know if there was a sudden change in the supply or demand. We’d want to know what industries or consumer groups switched to buying gold instead of something else or if a group of gold mines suddenly stopped mining.

When the price of everything is going up, then the dollar is losing value. Consider the rise in these commodities, as reported by Bloomberg News:

The Standard & Poor’s 500 stock index gained 17 percent this year, and the Reuters/Jefferies CRB Index of 19 commodities gained 13 percent, including a 97 percent jump in copper, a 60 percent rally in crude oil and a doubling of sugar prices.

When the price of “everything” is rising, you can protect yourself by owning a “thing” meaning a product, not fiat paper money such as US dollars or Euros or even the Australian dollar, rising recently due to central bank interest rate changes, though still a paper currency.

The key quote from the Bloomberg article is this:

Gold has more than tripled in the past eight years as the dollar tumbled 67 percent versus the euro, according to data compiled by Bloomberg.

Rise in monetary baseIf we were reporting the euro price like many news organizations report the dollar price, then the headline would be the “Price of euro rises 67 percent,” just like headlines read “Price of gold has risen 18 percent this year.” The underlying story for both prices rises is the massive devaluation of the dollar due to a massive increase in the monetary base.

If you had owned bullion this past year instead of dollars, you would have beaten the 13 percent increase in the Reuters/Jefferies CRB Commodities Index noted above. If you chose to own dollars, instead of bullion or a “thing,” the purchasing power of your money can buy 13 percent less commodities, meaning 13 percent less of mostly everything.

Gold as a crisis “hedge” explains that gold is a good “crisis” hedge but not necessarily a good inflation hedge because people tend to buy more gold during times of turmoil. During some instances of inflation, gold lost purchasing power.

From the peak in1980 the inflation rate declined but cumulative inflation climbed steadily upward. But rather than keeping up with inflation the price of Gold fell from the peak of $850 per ounce down to under $300 in 2001.

But in inflation adjusted dollars the scene is even worse. The 1980 peak in 2007 inflation adjusted dollars was over $2100 and it fell to under $346 losing a whopping 84% of its value!

So even though inflation rose… gold fell… because the fear level was low (and possibly because governments worldwide manipulated the price).