In a recent article I introduced the concept of allowing for the increased quantity of aboveground gold and the expansion of the quantity of dollar currency over time when trying to value gold. The purpose of this article is to explain why such an obvious adjustment is rarely contemplated and why it should be applied.
The reason no one adjusts the dollar quantity is we want to think of the dollar as having a constant value when we buy assets or goods. We describe prices of goods as rising or falling, and never the currency falling or rising. When we construct an index of house prices or stocks we do not take into account the debasement of the currency.
Except in times of price hyperinflation we are generally unaware of the corruption of economic calculation due to changes in the money quantity. The problem of valuing gold is however different, because gold remains the principal rival to fiat currency. It is therefore logical to adjust the gold/dollar exchange rate by both an appropriate measure of dollars and by the accumulating quantity of above-ground gold when making price comparisons over time.
The dollar, as the internationally-accepted fiat currency, is a good proxy for all the others, and the need to incorporate changes in the quantity of money has become urgent since the banking crisis, because the quantity of dollars has expanded rapidly.
Read the complete article at GoldMoney here.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.