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, December 13, 2003.

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    For more on Inflation

    FMF Policy Bulletin/ 6 January 2004
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