Tuesday, July 19, 2011

The Price of Gold

The price of an ounce of gold rose over $1,600 yesterday. I have frequently observed that gold is a hedge against out-of-control governments. It is a hedge against reckless fiscal and monetary policies. Often in the past, such policies led to higher inflation, which is why gold is widely perceived as a hedge against inflation. However, reckless government economic policies can also lead to financial ruin and deflation.

The price of gold is up at a record high in all the major currencies, suggesting that out-of-control governments are a worldwide plague. The nominal average price in dollars rose to $1,528 during June. In real terms, using the CPI as the price deflator, the price rose to $682, which was still below, but nearing, the record high of $865 during January 1980.

There is an interesting close correlation between the price of gold and the sum of US Treasuries and Agencies held by the Fed and foreign central banks. This shows that the price goes up as banks monetize the swelling debt of the US government. By doing so, reckless monetary policy accommodates reckless fiscal policy! (We regularly update these charts for subscribers to our service in  Currencies & Gold). 

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