"DAVID, REGARDING THE QUERY YESTERDAY REGARDING GOLD'S PERFORMANCE VS INFLATION, I HAVE 2 POINTS:

1) IN THE DAYS OF THE GOLD STANDARD BY DEFINITION GOLD KEPT UP WITH INFLATION SINCE GOLD WAS MONEY.

2) IN THE FIAT ERA, GOLD OVER THE LONG TERM WAS BEATEN INFLATION. FOR EXAMPLE OVER THE 40 YEAR PERIOD FROM 12/1969 TO 12/2009, THE PRICE OF GOLD DIVIDED BY THE US CPI INDEX INCREASED 5.41 TIMES, A REAL RATE OF RETURN OF 4.31% PER YEAR.

"OF COURSE, OVER SHORTER PERIODS YOU CAN GET ANY RESULT YOU PREFER. ALSO GOLD HAD BEEN HELD AT $35 FOR 35 YEARS IN 1969, SO THE PRICE HAD SOME CATCHING UP TO DO WITH INFLATION. BUT RETURNS WERE STILL POSITIVE IF YOU GO BACK TO 1942.

"KEEP UP THE GOOD WORK."

David Fuller's view Thanks, and I agree with your first point, although few of us can remember when currencies were last on true gold standards. The history of gold standards is interesting, not least that countries could not endure it indefinitely because their bullion reserves were eventually drained by creditors at the first hint of fiscal problems. This paragraph from Wikipedia is informative:


The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of the World War I. Treasury notes replaced the circulation of the gold sovereigns and gold half sovereigns. However, legally the gold specie standard was not repealed. The end of the gold standard was successfully effected by appeals to patriotism when somebody would request the Bank of England to redeem their paper money for gold specie. It was only in the year 1925 when Britain returned to the gold standard in conjunction with Australia and South Africa, that the gold specie standard was officially ended. The British act of parliament that introduced the gold bullion standard in 1925 simultaneously repealed the gold specie standard. The new gold bullion standard did not envisage any return to the circulation of gold specie coins. Instead, the law compelled the authorities to sell gold bullion on demand at a fixed price. This gold bullion standard lasted until 1931. In 1931, the United Kingdom was forced to suspend the gold bullion standard due to large outflows of gold across the Atlantic Ocean. Australia and New Zealand had already been forced off the gold standard by the same pressures connected with the Great Depression, and Canada quickly followed suit with the United Kingdom.

The Bretton Wood's Agreement of 1944 has been referred to as 'Gold Standard lite' and President Nixon scrapped it in 1971 because the USA would have otherwise run out of gold bullion.

My reservation about your second point is that I do not regard US CPI as an accurate measure of inflation in the USA (See Email 2 on Monday.) However I cannot think of a better very long-term hedge against inflation than gold.