The Price of Gold is Constantly Rising. Or, is Money Just Losing its Value?

· IMHO, Market Data
Authors

In the last decade, gold constantly rose in value. In this post, we will use public data to look into the value relationship of gold and money.

Value of gold measured in different currencies

Gold is definitely one of the oldest currencies. Until 1971, USD and gold were essentially the same using a fixed conversion rate. But, since gold is decoupled from USD, which currency is most stable measured in gold? To answer this question, we take a look into the annual return (performance) of gold in different currencies. A stable currency should have a low average return and a low standard deviation (Std) of the returns. Let’s take a look at the corresponding table:

Table with gold performance from 2003 to 2012 in different currencies

Source of data: goldprice.org, Statistics: ComputerAidedFinance.com

Now, we interpret the table – green means: “currency and gold are similar”, red means: “currency and gold are different”. Using this interpretations, we can see that CAD is more green than USD in 2003-2011 and CHF is more green than USD in 2007-2011. In both periods, USD is among the most stable currencies. But, this growths is pretty large – is this a sign of a stable currency? An average return of more than 10% p.a. in 2003-2011 seems too large.

Close look at USD

Within the financial crisis, the monetary base of USD increase significantly. That means, there are many more USD circulating than before. Does this growth in monetary base explain the growth of gold prices?

Using this data from US FED, the amount of USD rose in 2003-2011 from 714 to 2722 billions or 281%. This is impressive. But gold rose from 350 USD to 1650 USD or 375%.

Conclusion

The price of gold is rising. That is a fact in any currency. Even a close look at the monetary base in USD shows that the price of gold rises faster than the amount of money in the economy. So, will this trend stop? Yes, it will. But, only the future will show when. And to answer the question of the title: Measure in gold, money loses its value.

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