After studying this great blog : pricedingold.com, I came to suspect that measuring prices in gold doesn’t always reveal economic reality. Because:
A) The price of Gold often fluctuates greatly and irrationally, for example in the years 1970-1980.
B) The price of Gold is being manipulated (downwards, nowadays). For example, you can see huge short sells outside regular trading hours, often around the time of bank holidays when trade volumes should be very low. The magnitude and timing of these trades suggests a deliberate attempt by “insiders” to drive the price down. Another point of evidence of manipulation is the volume of real gold traded. There is almost no physical gold traded on American exchanges today. 99% of gold trades are paper. There is additional evidence of this manipulation – at gata.org, for example.
So – what to do? Official inflation statistics are not reliable of course. One very good and reliable (to me) calculation of inflation is chapwoodindex.com. But I had a notion that there might be a better approach…
First lets take a look at money creation. It is perfectly understandable that a government would double the money supply if the population doubles, in order to keep prices stable.
But if government doubled the money supply but there is no population growth, prices will almost certainly double (while population in general won’t become richer).
The same applies inversely. If government creates no money, but the population doubles, prices will most likely go by one half (but the population in general won’t become poorer).
So let’s try to remove the effect of money creation on prices by dividing prices by the increase money in circulation. If the money supply doubles, lets divide prices by two. If there is 10 times more money, lets divide prices by 10.
NOTE: the significant advantage of this approach is that the money supply grows steadily without short term fluctuation, so it provides much more stable benchmark than gold (in my humble opinion).
My charts generally begin with the year 1970 because the insane money-printing in the fiat money system started in the year 1971. I use annual data (last day of the year).
So welcome and enjoy! Continue to the “Intro” menu to learn more about the calculations, or go straight to the charts.