Gold prices and inflation

Some supply-siders believe the pronounced rise in the price of gold in recent months is a warning of future inflation, says Larry Kudlow. The collapsing dollar of the late 1960s and 1970s, measured as an enormous rise in the dollar-price of gold, heralded hyper-inflation and stagnation – known as stagflation. And in the late 1980s, an unwanted depreciation of the dollar in terms of gold and foreign currencies triggered a mild re-inflation, which temporarily moved back up to 5 percent.

Looking at constant-dollar gold prices – adjusting the value of the dollar for the effects of inflation:

The price of gold slumped from $1,207 in 1980 to $260 in early 2001.

It has rebounded to $364 today.

Kudlow welcomes the rise in real gold prices over the past three years as a sign that the Federal Reserve is supplying the money the economy needs, whereas in 2000-2001 it choked off the money supply.

However, he says, "[T]he mission for U.S. economic policy should be to stabilise the value of the dollar in terms of gold and the major foreign currencies."

Source: Larry Kudlow, In Need of a Clear Picture? Tune in to Constant Dollars, Investor's Business Daily, December 16, 2003, and Townhall.com, December 13, 2003.

For text http://www.townhall.com/columnists/larrykudlow/lk20031213.shtml
For more on Inflation http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/ 6 January 2004