Yesterday, the price of gold rose to a record for a second day. Gold is widely perceived to be a hedge against inflation. Actually, it is a hedge against reckless monetary and fiscal policies. One of the best measures of global monetary policy is non-gold international reserves held by central banks. The monthly data are compiled by the IMF. The price of gold seems to track the parabolic trajectory of the reserves data relatively well. Over the past decade, the price of gold has soared 470% from a low of $255.95 an ounce on April 2, 2001 to $1,459.10 this morning. Over this period through January, reserves held by central banks soared 376%, much faster than the 121% increase during the previous 10-year period, when the price of gold fell 28.4%.
The correlation between the price of gold and the US federal debt to nominal GDP ratio isn’t quite as close as the relationship shown above, but it is close enough to suggest that reckless fiscal policy in America is contributing to the run-up in the price of gold.