Is Gold a Valid Global Inflationary Indicator?

When looking at gold prices in both the short and long term, one would have to accede to the belief that the glittering metal’s ongoing price gyrations are generally reflective of gold’s economic value trends.

This is confirmed by the historical gyrations of gold since its price control, imposed by President Franklin Delano Roosevelt in 1935, and then cut loose permanently from all price limitations during President Richard Nixon’s first term.

In examining gold prices’ ups and downs since then, it’s apparent that they have followed a remarkably similar trend to the global economy’s inflation/deflation journeys. Although some of these price tremors have occurred in anticipation of overall economic pricing direction change, that long-term perspective has not changed in the 41 years since gold has pivoted on the buy/sell principle of all world-traded commodities.

To bring this overview into a more recent perspective, one can cite its 1980 all-time record (since adjusted for subsequent inflation) at over $800 per ounce. The bubble of that runaway price started bursting during the Reagan years’ transition as the economy benefitted by a collapse of hyper-inflationary commercial interest, mortgages and the Federal Funds rate.

Gold then fell to the $200-400 level, and its pricing meticulously followed the orderly economic growth of the 1990′s and the initial decade of this century. At first gold seemed only marginally affected by the financial crash of late 2008. Although backing off slightly from the multi-hundreds of dollars level to which it had gravitated pricewise, it started taking on the hue of a fall-back monetary investment during the following 18 month recession.

But even as the dollar gained strength vis-a-vis major world currencies, gold increasingly took on the ultimate “safety valve” investment persona. With one-third of world gold ownership residing in the vaults of global banks, limited physical gold available, and the unprecedented promotion of that metal as an alternative to “doom and gloom,” its prices again skyrocketed to near $2000 an ounce early in 2011.

Since then, it has slid back to near $1550 before again reaching a 2012 high of $1775.50 most recently. What has given gold and other commodities the latest shot in the arm has been the Federal Reserve Board’s mid-September quantitative easing and $40 billion monthly buyback of the subordinated mortgage debentures, sitting worthlessly in America’s major banks for years.
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