All That Glitters

You may have noticed that there is an increased interest in Gold as of late. Right now I am not going to go into the details of what I think is driving this, but instead just look at some of the historical behavior of Gold.

Here is a chart of real gold prices since 1913.

We can see clearly that prior to the 1970s that the convertibility of dollars into gold meant that gold and the general price level moved in tandem. Consequently the real price of gold was more or less stable.

I would just take a brief moment to note that while this is the way we all assume that world works (gold linked to money implies gold linked to overall prices) this is not a logical necessity but an empirical observation.

However, we can also see that since the collapse of Bretton Woods the real price of gold has been quite volatile and that the majority of the movements in the nominal price have been real movements.

Moreover, the real price of gold does not tend to stabilize because consumer prices generally move towards the price of gold but because the price of gold returns to the level of consumer prices generally.

On a very crude level this tells us the gap between gold and consumer prices is not because consumer goods are “under-priced” and due for a rally. A rally that most of us would simply label – inflation. Instead, it looks as if gold is over priced and due for a correction.