Myth 1: Gold is at an all-time high.
Fact 1: It’s not if you adjust for inflation.
Media pundits and policy makers claim that gold is at an all-time high. At Carpe Diem, University of Michigan economist Mark Perry has a useful chart showing that this is only true because such comparisons fail to take into account the effect of inflation on the dollar’s value over time.
For example, the average nominal price of gold was $612.56 in 1980 and $610 in 2006. How much did the dollar’s purchasing power decline in those 26 years?
Since the value of a dollar changes over time, comparing the price of any good over time requires that we adjust the current price for inflation. And it turns out that gold is only at record highs if you fail to adjust for inflation.
Perry’s chart uses data from Global Financial Data to show the changes in the inflation-adjusted price of gold from 1970 (the year before the United States last left the gold standard) to 2010 in real 2010 dollars. Adjusted for inflation, the price of gold today is 41.5 percent below the January 1980 peak of more than $2,000 per ounce (in 2010 dollars).
While not at record highs, the price has certainly been rising. It began doing so a decade ago, around the same time oil prices began rising. Both fell sharply in the 1980s and 1990s, but they began to increase around 2000, partly because rapid economic growth in Asia was lifting demand for all sorts of commodities.
Myth 2: Gold is a hedge against inflation.
Fact 2: Gold prices are typically more volatile than the Consumer Price Index.
This chart compares the changes in the price levels of gold in red with the consumer price index in blue (recall that the consumer price index, or CPI, is a measure of the changes in prices of all goods and services purchased for consumption by urban households). As you can see, the price level of gold fluctuates drastically while the CPI shifts more modestly. Simply put, this chart illustrates that the price of gold has been more volatile than the overall price level in America throughout recent history.
If gold were indeed a hedge against inflation, we should expect to see a smoothly sloping line illustrating the changes in the price of gold coupled with a more jagged line illustrating the changes in the overall price level—but this is not the case.