• 547 days Will The ECB Continue To Hike Rates?
  • 547 days Forbes: Aramco Remains Largest Company In The Middle East
  • 549 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 949 days Could Crypto Overtake Traditional Investment?
  • 954 days Americans Still Quitting Jobs At Record Pace
  • 956 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 959 days Is The Dollar Too Strong?
  • 959 days Big Tech Disappoints Investors on Earnings Calls
  • 960 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 962 days China Is Quietly Trying To Distance Itself From Russia
  • 962 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 966 days Crypto Investors Won Big In 2021
  • 966 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 967 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 969 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 970 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 973 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 974 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 974 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 976 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

Should the Gold Price Keep Up with Inflation?

The popular belief is that gold is a good hedge against inflation. Owning gold will protect you from rising prices. Is that true?

Most people define inflation as rising prices. Economists will quibble and say technically it's the increase in the quantity of money, however Milton Friedman expressed the popular belief well. He said, "Inflation is always and everywhere a monetary phenomenon."

There you have it. The Federal Reserve increases the money supply and that, in turn, causes an increase in the price of everything, including gold. It's as simple as that, right?

Except, it doesn't work that way. Just ask anyone who has been betting on rising commodities prices since 2011. Certainly the money supply has increased. M1 was $1.86T in January 2011, and in March it hit $3.15T. This is a 69 percent increase. However, commodities have gone the opposite way. For example, wheat peaked at $9.35 per bushel in July 2012, and so far it's down to $4.64 or about 50 percent. And the price of gold fell from $1900 in 2011, to $1050 late last year, or 45 percent.

Would you say that inflation is +69%, or is it -45% or -50%?

Most people look at retail prices, not raw commodities or gold. Retail prices have not followed into the abyss. Love it or hate it, the Consumer Price Index registers a cumulative 8 percent gain from 2011 through 2015 inclusive.

Let's consider an example to help understand why. Suppose you own a coffee shop in a central business district. The city enacts a new regulation that limits the hours for delivery trucks. This forces you to pay overtime wages to your staff to unload the trucks, and of course, the carrier charges more for delivery too.

Next, the city allows poor people to stop paying their water bill. So to compensate, they raise the water rates on businesses. While they're at it, they raise the fees for sewer, garbage, gas line hookups, fire inspections, and sign permits. The state passes a higher minimum wage law. The building inspector requires that you increase the size of your bathroom to accommodate wheelchairs, and you lose revenue-generating floor space. There are hundreds of ways that government increases your costs.

Is this inflation?

Not yet, costs are up but not prices. Sooner or later, all of the affected coffee shops try raising their prices. Consumers don't necessarily want to pay more for coffee, so a few shops fail. The survivors are now charging 15% more for coffee. They have their higher prices, at the cost of lower sales volume.

The burden of government bearing down on the coffee business only increases. Every day, three constituencies conspire to drive up costs. We'll call them the "there oughtta be a law" crowd, the "government needs more revenues" mob, and the "they served 10oz of coffee plus 4oz of ice so let's sue them" racket.

Regulation, taxation, and litigation drive up price. Friedman was wrong. The rising price of lattes is not a monetary phenomenon (the monetary system is pressuring prices lower right now, and in my theory of interest and prices I discuss why). Rising retail prices are a fiscal, regulatory, and judicial problem.

There is no reason for the price of gold to follow retail, because there is no mechanism that connects gold to these non-monetary costs.

 

Back to homepage

Leave a comment

Leave a comment