The Facts About Gold

Separating economic myths from economic truths


Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

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.

Over the past 10 years, gold's average volatility in a given month was 4.9 percent, according to the World Gold Council; compare this to a roughly 0.15 percent average monthly variation in the Consumer Price Index during the same time period.

So why do investors purchase gold in times of economic recession? Some investors may buy gold to shelter their assets from the risk of inflation. However, it appears that investors overall view gold more as a "crisis hedge." According to the Gold World Council's study "Gold Hedging Against Tail Risk," gold is a hedge against infrequent or unlikely risks that could nonetheless dramatically affect one's portfolio, such as government default, systemic risk, and revolution. To many people, gold is a safe commodity in uncertain times.

Another potential factor driving the price increase is that these prices are set in a global marketplace which faces increasing demand and decreasing supply. As emerging markets acquire wealth, they demand more gold jewelry and more investments in gold. The study "Gold: A Commodity Like No Other," for example, says that jewelry is responsible for roughly 50 percent of the market for gold. Gold imports into China have soared this year, making the country a major overseas buyer of gold for the first time in recent history. Indeed, China is on track to overtake India as the world's largest consumer of gold.  

The chart above uses data from the United States geological survey to chart the annual world gold production every year since 1900. As you can see, increasing world demand has been accompanied by a slowing level of world gold production, which could explain some of the increase in the price of gold.

Myth 3: We are sitting on a gold mine.

Fact 3: While gold is worth more than we think, it is not nearly enough to make a dent in the national debt.

At roughly 74 percent, gold makes up the vast majority of the cash, bond, and commodity reserves of the United States. These gold holdings are systematically undervalued since by statute one ounce of gold is priced at $42.22; this number differs starkly from the market price of gold.

According to the Department of the Treasury, the U.S. Treasury holds roughly 264.3 million troy ounces of gold, marked at a value of $42 per ounce, giving a reported value of $11.1 billion at the end of fiscal year 2010. However, if the total U.S. gold holdings were valued at the recent spot price of $1,500 per ounce, they would be valued at near $400 billion.

That is certainly a significant amount of money, but $400 billion still would not cover the debt (not that we shouldn't sell the reserves if we need to). More importantly, any attempt to sell our reserves would drive down the price of gold by flooding the market.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

NEXT: Mitt Romney Likes the Defense Budget Just the Way It Is, Thanks

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. According to the Department of the Treasury, the U.S. Treasury holds roughly 264.3 million troy ounces of gold

    Paging Dr. Paul! Dr. Ron Paul!

    1. It’s a colored metal. Next!

  2. Gold is such a shit “investment”.

    1. Gold is not an investment. It can never pay interest or dividends. Depending on how one’s perspective, it’s either money or a commodity speculation. Gold is perhaps the best way to speculate against the health of fiat currencies, which has been pretty profitable in the past few years.

  3. What is the purpose of this article? Veronique appears to be steering away from what gold is important for, and that is as a commodity that can be used for indirect exchange due to people valuing it. Printing paper bills that are then used to buy debt is certainly not a good thing, and certainly does the economy no good. It’s that we have gotten so far removed from real money that gold is only talked of as investment.

  4. Sorry for the threadjack, but I wasn’t sure if this has been posted yet today. Indiana Supreme Court says that “We believe … a right to resist an unlawful police entry into a home is against public policy and is incompatible with modern Fourth Amendment jurisprudence.” Earlier in the week they ruled in a different case that police serving a warrant may enter a home without knocking if officers decide circumstances justify it.

    What the fuck.

    1. You’re “jack” is better than this article, and I’ve been wondering why this Indiana decision is not a headline at many sites.

      1. When my constitution goes out of whack I use Metamucil…

        The Constitution has become a politicians soundbite as NOT A ONE of them believes in ANY of it. That is, unless the religious right isn’t voting. Then it becomes a verbal diarrhea out of their mouths. Until they’re elected, then it’s back up on the shelf until the next election cycle.

    2. Jesus Fuck Me that’s scary.

      Also – WTF???!!

      is incompatible with modern Fourth Amendment jurisprudence

      Those sea-steading freaks are sounding better and better all the time, I tell ya.

      1. The Constitution is “incompatible with modern Fourth Amendment jurisprudence.”

      2. “is incompatible with modern Fourth Amendment jurisprudence”

        Translation: Fuck the US Constitution.

        1. Translation: Fuck the US Constitution.

  5. The United States owns eight tons of gold which, besides being shiny and having some industrial uses, has little intrinsic value. Veronique prefers diamonds, anyway.

    1. There is one fatal flaw with gold. Once we start exploiting resources on other worlds in the solar system, gold won’t have nearly the value it has now. So I’d buy some puts for, oh, 2150.

      1. Using a specially developed reactor it would probably cost less to turn lead into gold then to fly to Mars and mine it.

        1. We ain’t colonizing shit if we ain’t got cheap access to orbit.

  6. Frog dames like diamonds better than gold because they’re easier to hide in secret places.

    1. That’s almost funny.

  7. Doug Casey Debunks the Myth that “any attempt to sell our reserves would drive down the price of gold by flooding the market.”:

    The U.S. government reports that it owns 265 million ounces of gold. Let’s say that’s worth about $400 billion right now. I’m afraid that’s chicken feed in today’s world. It’s only a quarter of this year’s federal deficit alone. It’s only half of one year’s trade deficit. It represents only about 5% of the dollars outside the U.S. The U.S. government may be the largest holder of gold in the world, but it owns less than 5% of the approximately 6 billion ounces above ground.

    From the ’60s until about 2000, most Western governments were selling gold from their treasuries, working on the belief it was a “barbarous relic.” Since then, governments in the advancing world ? China, India, Russia and many other ex-socialist states ? have been buying massive quantities.

    Why? Because their main monetary asset is U.S. dollars, and they have come to realize those dollars are the unbacked liability of a bankrupt government. They’re becoming hot potatoes, Old Maid cards. But the dollars can be replaced with what? Sovereign wealth funds are using them to buy resources and industries, but those things aren’t money. And in the hands of bureaucrats, they’re guaranteed to be mismanaged. I expect a great deal of gold buying from governments around the world over the next few years. And it will be at much higher dollar prices.

  8. Debunking Anti-Gold Propaganda:…..propaganda

  9. Good article. The libertarian obsession with gold is sort of embarrassing, it needs to be weeded out.

    1. Huh? As I said above, she proves nothing, only speaking of gold in terms of it as commodity and not a money. Gold will always have value (subjective) and as such is desirable to be used as a money, rather than something that has no value and indeed is created representing debt.

    2. It’s not an obession about gold. It’s about the right to make contract with what ever the buyer and seller want to deal with. Gold just has a long history as the free market money. Not obession, historical fact.

    3. I’m with Len and matt on this one. Think about what characteristics would make a particular commodity ideal for use as money. You’d come up with things like a stable supply (i.e., non-perishable, but also scarce), limited utility for direct consumption, and general consensus as to its value (as jewelry, for example). There’s a reason why humanity has returned to gold and silver time and again.

      1. Who would want gold as currency as volatile as it is?

        Real estate is down 20ish% and the country is in panic mode.

        Gold will go to $750 or $2000 in the next year while the dollar barely moves.

        1. We should be allowed to make that choice ourselves. End the legal tender laws and we will see who is correct. No force needed.

        2. Once again, somebody misses the point about the purpose of gold as money. It doesn’t matter how volatile the intrinsic value of gold is if everyone is using it as currency. If we’re using gold as money, and China uses gold as money, fluctuations in the overall value of gold will not effect our balance of trade or our willingness to invest with each other. Under our current system, strategic currency manipulation is unavoidable.

          Personally, I’m not for a strict gold standard. It is important to allow people to use anything that they want as money. Have a lot of debt? Refinance it in a currency that is bound to fall in value over time and pay your employees with this money. What about the employees’ savings? They can trade their currency for a currency that is likely to go up in value over time. Free banking is the solution, not a strict gold standard. Forcing anybody to accept or use any currency that they wouldn’t prefer is tyranny, even if it is gold.

          1. You realize you’re arguing with screech right?

      2. OK, I get some of gold’s appeal … “Oh, shiny!” But, the real test of is it a currency or not, will come WTSHTF. Which, is exactly what some people are buying it for. Say you have a small farm. The hordes need food. Are you more willing to trade your food for shiny metal which no longer has any possible use; or are you more likely to trade for tools, ammo, guns, other foodstuffs you don’t grow. I suspect a lot of doomsday believers are going to be sadly disappointed when their beloved heavy metal is rejected by anyone with common sense.

        1. Right-o!

    4. The popular obsession with little slips of paper that represent finite ownership in a limitless supply of other little slips of paper that promise to pay yet more little slips of paper is even more bizarre.

      1. here, here!
        the little slips of paper is the governmental equivalent of a perpetual motion machine…
        if we are looking at the little slips of paper as representing a certain amount of “work done” to be exchanged for another amount of “work done”… then at least we know that real work has been done in mining / refining and distributing the lump of metal…. as opposed to we the peasants paying for the distribution of the fore mentioned paper… where the paper has also been paid for by we the peasants…

      2. Just how bizarre is it? More than once over the years people have told me that the little slips of paper are now or soon to be worthless! Well damn I say, since they are worthless why don’t you give all your little slips of paper to me and let me carry them around for you!
        I just can’t figure out why no one ever lets me bear their self proclaimed valueless certificates. Bizarre, isn’t it.

  10. Nice try, but I don’t really buy this. Even if you’re not enamored of Austrian arguments about metal-backed vs. fiat currencies, there’s still a good argument for owning precious metals as part of a diversified investment strategy. Because gold and silver are widely considered valuable for their beauty, they’re about the only type of asset you can hold that keeps its value in inflationary conditions. And inflationary conditions are a part of the business cycle.

    I don’t see why Myth 1 or Myth 3 are either here or there; who cares whether gold’s at an all-time high or not, or whether the value of gold could pay off the US debt? As far as Myth 2, it’s tough to make that argument with data, insofar as most Americans have had 401(k)s rammed down their throats and have no idea that they should buy gold to hold onto. In other words, the data don’t really prove the argument.

  11. The only reason CPI is more stable than gold is because CPI intentionally looks for goods that do not change much in value. Besides, it obviously is a hedge against inflation as when it is worth more due to inflation then the person who holds the gold can sell for a lot more.

    Gold has always been chosen in history as the commodity for trading. How can we argue against that history?

    1. Gold isn’t a good hedge against inflation if you mean low levels of inflation that occur regularly. However, as she states, it serves as a safe haven in times of severe uncertainty ie when there are fears of a sovereign default or currency collapse.

      The reason gold is more volatile than the CPI is simple: in our current market, gold is not money (it’s pretty much forbidden to be anyway). However, in those aforementioned times of crisis, the prospect that it will once again resume its status as money.

      The value of gold in this scenario depends on the end game. Are we going to see a bubble collapse or a crack up boom? Sell at the top if the former, hold on if the later.

  12. Soros, the great capitalist, was a heavy buyer of gold throughout 2010 while calling it a “bubble” the whole time.

    This is what makes markets great. When do you sell? Who can call the top of a bubble?

    That group of 20 hedge fund managers that meet privately in NYC monthly will someday buy puts on gold and furiously sell.

    Do you fell lucky?

    Personally, I think a 1% Fed Fund rate will drive gold below $1200 right away.

  13. 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).

    How much did a web host charge per gig of hard drive space in 1980?

    1. That is why the dollar buys more than ever.

      Tell that to the Paultards, please.

      1. He is talking about an industry that has very little regulation and we have seen massive innovation that has helped pushed prices down. If you look at staples like food, energy, housing, medical service etc. we see massive increases. I mean really, are you trying to argue that cost of living has decreased since 1913?

      2. The dollar buys more than ever of *certain* types of goods. Obviously, we can buy more TVs. More food? Not necessarily. Trade and technology have been pushing prices down while monetary policy has the opposite effect.

      3. As if technology has nothing to do with decreased costs. Friggin clueless economic tards always ignore how technology factors in to economics, and increased production and efficiency, thus making more of products available at lower costs. How does printing more paper that is not reflective of labor producing a commodity or founded in any tangible asset related to reduced costs?

  14. My advice on precious metals:

    They are essentially an insurance policy against currency devaluation/collapse (which history tells us happens to every fiat currency).

    As such, you should hold the actual metal, personally.

    Unless you are truly rolling in money, no more than 10% of your net worth should be in precious metals.

    I view my stash of gold and silver coins as deep savings, to be used only in the direst emergency.

    I also speculate a little with paper gold and silver, but its strictly speculation. I’ve done pretty well the last few years, but right now I’m stopped out of silver, and getting close to my stop on gold.

  15. RE: “As you can see, increasing world demand has been accompanied by a slowing level of world gold production, which could explain some of the increase in the price of gold.”

    Err… no. Production since 1997 has been dead ass flat at an average 2474, +/- 3.8%. And a trend once in place is more likely to remain than to change. Increased demand, regardless of reason drives the price, not saying I’m bullish or anything.

  16. myth 2 – chart 2 :
    Dr. de Rugy;
    interesting chart. What do the time leveled (best fit)curves look like for the CPI vs. Gold price?
    My first pass guess is they run somewhat parallel…
    (i’m too busy….ok, ok… too lazy to do it myself)

  17. Fiat paper reserve notes vs. gold — which has intrinsic value?

    US currency used to have an intrinsic value because you could exchange it for its face value in gold or silver. What value it holds now derives from the ability to pay your US taxes with it, hence avoiding prison time.

    Gold has intrinsic value since it is desired for use in jewelry, as an industrial metal in semiconductors and circuit boards, and as a store of wealth that is both private and enduring.

    Which would you rather have — a gold coin from the defunct Roman empire, or a fiat paper note from the defunct Confederate States of America? Governments and empires come and go, but gold has held its value for thousands of years.

    Even if a government persists on its host for centuries, the government’s printing presses can and do diminish the value of its fiat paper reserve notes over time scales less than that of the average human lifetime.

    1. Fiat paper reserve notes vs. gold — which has intrinsic value?

      Neither. All value is subjective.

      1. All value is subjective, but some are more subjective than others.

  18. If and when the SHTF, gold and precious metals are not what you need. You need guns, canned goods, spices and access to fresh meat and vegetables.

    The volatility of gold that Veronique has demonstrated is why it is no longer being used as a currency.

    Gold and silver are far from immune to inflation and deflation–look at the history of Spain and Europe when they were importing tons of silver and gold from the New World. Because they bought into the idea of the intrinsic value theory of money, they didn’t realize that throwing more gold and silver at things just made gold and silver worth less than it had been, it din;t make them actually richer.

    1. So it was still worth it. Michael bay shuld direct a movie with conquistadors invading the new world and getthing the lewt. It would be badss so stfu you haters.

  19. The article makes some good points but I still believe we should go back to a gold/silver standard as that is what the constitution requires.

  20. [knock knock]

    De jure currency monopoly – bad. Competition – good.

    End of story.

  21. china racking-shelving is very good

  22. Gold and silver are far from immune to inflation and deflation–look at the history of Spain and Europe when they were importing tons of silver and gold from the New World. Because they bought into the idea of the intrinsic value theory of money

  23. The volatility of gold that Veronique has demonstrated is why it is no longer being used as a currency.

    It depends on what your baseline is, whether gold or fiat currencies are volatile.

    But, point taken nonetheless. However, its volatility probably has something to do with the fact that it is not traded as currency, but as a speculative commodity.

    I prefer to look at the longer run, where, over decades, fiat currencies inevitably decline in relative value.

  24. Gold, right or wrong, is used as a store of value, not an investment long term. For example, you can still buy a fine Italian suit for one ounce gold just as you could 200 years ago. Also, does the author really think the Fed’s inflation stats are correct? How about mapping gold to the energy and food sub-index?

  25. The reason gold is not used as currency in the US is that only the dollar can be used to pay taxes in US by fiat. That is until the dollar collapses. So gold is a hedge of value as well.

  26. “Gold and silver are far from immune to inflation and deflation–look at the history of Spain and Europe when they were importing tons of silver and gold from the New World.”

    “The article makes some good points but I still believe we should go back to a gold/silver standard as that is what the constitution requires.”

    It seems humans are doomed.

  27. Are gold and silver somehow magically immune to the laws of supply and demand?

    When the supply of metal is higher than the demand for currency, prices in terms of gold and silver will rise. When the supply of metal is lower than the demand for currency, prices will drop. Just as they do with a fiat currency.

    As it was said in the 17th century, “in Spain everything is expensive except silver”. Lots of silver around, little to spend it on. Prices in Europe went up between 300% and 400% due to the importation of silver and gold.

    So let’s not hear about this mystical “store of value” property that precious metals supposedly have. History shows that they are subject to the laws of supply and demand like any other commodity.

  28. Also consider, besides inflation–if the economy doubles so must the supply of gold and silver if prices are to remain stable. Can gold and silver production be increased to meet the demand for money? Not easily, and so you get price shocks.

    A cursory reading of European history reveals this over and over.

  29. If an economy grows twice as fast then re-peg to gold. But that will be rigged to as Bretton Woods showed. Seems humans are doomed. Gold is still a store of value over the LONG TERM (20 years or more) or during a currency collapse.

  30. Article 1 Section 10: No State shall…make any Thing but gold and silver coin a Tender in payment of debts…
    This article has never been repealed or amended.

  31. I have some questions:
    1. What about the intrinsic value of the metal?
    2. Is the price increase in proportion to increase in the inflation?
    3. India and china has been traditionally buying gold for ages. Certainly demand has gone up. however with the long term supply demand theory, suppliers would then try to produce more and prices would come down…its not happening yet.
    4. I believe its a bubble and would burst one day (probably yes, when US or any other troubled sovereign treasury starts dumping the gold) as a last resort. What do you think?

  32. Myth 2: Gold is a hedge against inflation.

    But it is a hedge against hyper-inflation. Admittedly, not a big concern in the US, Canada, or the EU.

    By the way, that chart for Myth 1 is neat. I wish the guy had gone back a lot farther than 1970.

  33. The CPI is a joke.

Please to post comments

Comments are closed.