I wrote the following commentary/analysis for Kinesis Money’s Blog:

With inflation raging and the price of gold seemingly not keeping pace with rising rates, articles suggesting that gold is no longer a valid hedge against inflation or preservation of wealth assets have proliferated in the mainstream financial media.

However, as I’ll show, nothing could be further from the truth. While the price of gold is subject to short-term volatility, an examination of the data over a long period suggests that gold is a perfect ‘hedge’ against inflation.

Inflation and gold

The term “inflation” is commonly used in reference to rising prices as measured by the Consumer Price Index (CPI). However, this is not technically correct. The economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in economic wealth output.

As Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” This aptly describes Central Bank monetary policy in relation to wealth output since Quantitative Easing – aka “money printing” – commenced in late 2008.

Price inflation is thus caused by inflation of the money supply. The concept is pretty simple: when the money supply increases at a rate in excess of wealth output, there are more currency units relative to the supply of “wealth units,” where wealth units represent the number of goods and services supplied by an economic system – leading to more money “chasing” a relatively lesser amount of goods and services. When this subsequently occurs, the law of supply and demand dictates that price of the wealth units will rise.

Let’s take a look at the data. The chart below shows the price of gold vs. the CPI and the M2 money supply going back to 1990):

Read the rest of this article here: Kinesis Money


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