Gold based system

by reader vtcodger

In a discussion on November 16th under the title The Gold Standard in One Easy Quote, I suggested inverting a chart of the spot price of gold in dollars to get a chart of the way a gold based currency would behave. Rdan thoughtfully inverted said chart (labels and all) and asked me to write up whatever the heck it was I was thinking of.

What I was thinking is that if Gold is indeed a true measure of value then a chart of the spot price of X amount of Gold is a chart of the true price of a market basket of goods and services over time. In fact, the extent that such a chart differs from a straight horizontal line ought to be a pretty good chart of inflation in the fiat currency over time. Might be a good way to check if CPI actually describes inflation. So here’s the chart.

Oopsie. Kind of bumpy, no? Belay that inflation checking thing. Data seems way too noisy for that.

Why invert the chart?

Well, we’re kind of used to looking at charts where economic downturns point down, not up. And those peaks in the price of Gold correspond to times where those who have cash will thrive and those who have borrowed will be in trouble — especially if they are leveraged. They must repay Gold they borrowed in easier times with Gold that has become dear. Times like … well … today. So here is the inverted chart.

There are two kind of scary things about the charts whether right side up or inverted. One is the amount of volatility. The value of either Gold or dollars is apparently often bouncing by 10-20% or more in a few weeks. Quite large changes are seen in a few months or a year. It probably isn’t dollars that are bouncing. If it were, we’d see that in in other metrics like inflation. It would, I think, be difficult to transact modern business with a currency whose purchasing power was that variable. The second is the relatively small amount of time that the inverted chart spends in sustained upward trends that would seem to be growth intervals of expanding money supply 1979-81, 1982-1984, 1987-1992, 1996-2000.

This little essay is hardly the final word on the efficacy of a Gold Standard. But I think these charts ought to give even the most fervent gold bug pause. If the charts really tell us about purchasing power and economic growth in a Gold Standard world, my feeling is — Thanks no, I’d go with a fiat currency or maybe Milton Friedman’s constant money supply growth. Don’t need no steenking Gold.
by vtcodger

Rdan here:
Also bullion has a run on and suppliers run dry