The Inflationary Supply Of Unbacked US Dollars And The Price Of Gold

THE INFLATONARY SUPPLY OF UNBACKED US DOLLARS AND THE PRICE OF GOLDArguments for returning to a gold standard reappear periodically, typically around times when inflation is raging

Degussa | Let us talk about the relation between the US dollar price of gold and the quantity of US dollar. In fact, one would think that it is, economically speaking, a rather straightforward relationship: All you need is to compare the supply of physical gold and the quantity of US dollar. If the increase in the quantity of US dollar exceeds the increase in the supply of gold, one would expect gold to become more expensive in US dollar terms (other things being equal); and if the increase in the supply of gold exceeds the increase in the quantity of US dollar, the gold price in US dollar terms should go down.

In the period from 1900 to 2018, the increase in the quantity of US dollar was around 6.4 per cent per year on average (compound rate), while the increase in the physical supply of gold was just 1.8. This would suggest that, over time, the price of gold in US dollar terms has traded upwards. And indeed it has, as the chart above shows. Most notably, the price of gold has been (more or less) traded upwards since the early 1970s; before that the price of gold had been fixed vis-à-vis the US dollar (in other words: US dollar had been an equivalent to a fixed weight of physical gold).

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.