Inflation Adjusted Average Gold prices

Inflation Adjusted Annual Average Gold prices in September 2009 Dollars.

Source:  inflationdata.com

From 1880-1914 the U.S. dollar official gold price was $20.67 per ounce and the U.K. official gold price was £ 4.24 per ounce. By 1914 most countries in the world were on a Gold standard. This Gold exchange rate was maintained by a complex system of transferring Gold from New York to London. Creating a system of checks and balances that should have prevented the onset of inflation.

This worked fairly well until other countries began abandoning their Gold standard to finance the First World War. The U. S. entered the war late and was able to maintain its gold standard.

See that in the graph the nominal price of Gold is flat but the inflation adjusted price is not. If Gold perfectly hedged inflation the inflation adjusted price of gold would overlap the nominal price.

 In the figure 4 "Cumulative Inflation by decade" from 1913 through 1920 inflation (as measured by the CPI) had increased by almost 98% (in other words in 7 years prices had almost doubled) but the price of Gold remained flat (by Government decree).

Then, over the next 10 years deflation set in as the roaring 20's unfolded as the US economy boomed and Europe suffered the after-effects of WWI. Finally, in 1929 the system could not stand the internal stresses and the stock market crashed ushering in the Great depression.

In 1933, President Franklin Roosevelt realized that the U.S. could not maintain the pretense that Gold was still worth only $20.67 per ounce (because at that price foreign government would have bought all the U.S. gold). So he perpetrated one of the greatest frauds ever on the American public. He forced U.S. citizens to sell their Gold at the official price of $20.67 and once he had collected all the Gold into government coffers, he adjusted the price to its real price of $35 per Troy ounce. Thus the government made a handsome 69.33% profit in a few months (equivalent to a 69% tax on Gold owners).

This effectively, increased the money supply and "legitimized" the inflation that had silently been occurring behind the scenes as prices increased but gold values did not. In hindsight, this increase in the money supply may have been the key factor in the emergence from the Depression.

Notice that in 1930 inflation since 1913 was up about 64% ... is it any coincidence that the Federal Reserve raised the Gold price 69%? No! that one time adjustment just brought it in line with inflation. But that didn't solve the problem permanently. By 1970 inflation was up 306% and gold was still officially $35 an ounce. Once again the price of gold needed adjusting.

Although U.S. citizens could not own gold, foreign governments could continue to present their foreign exchange tickets at the "gold window" and the U.S. was obligated to pay up in Gold.

So in 1971 President Nixon ended the US gold standard. At that point the price of gold bullion was allowed to float freely and find its own level.

This time rather than take all the Gold from the people (since they had none) the Government raised money by allowing the people to buy Gold back at the new higher free market prices.

Government gold sales had a tempering effect on gold prices for a while as the government liquidated its excess gold bullion. But by the late 1970's the government had stopped its gold sales and the price took off.

Many felt that this rise was in response to inflation. From the peak in1980 the inflation rate declined but cumulative inflation climbed steadily upward. But rather than keeping up with inflation the price of Gold fell from the peak of $850 per ounce down to under $300 in 2001.But in inflation adjusted dollars the scene is even worse. The 1980 peak in 2009 inflation adjusted dollars (figure 6) was over $2100 and it fell to under $346 losing a whopping 84% of its value!

So How High did gold really go?

In today's dollars, 1975 gold at $196 is more like $700 in the current market. And 1980 gold, the peak year at the historical price of $850, would now be closer to $2,189.

So if America has 8,180 tons, nearly 261.7 million ounces of gold in reserve, how many dollars does that buy?  By 1980, for every ounce of gold in America, the financial system carried $6,966 in cash. That's $1.8 trillion total. But by the end of 2005, the total real money supply shot to over $10 trillion (see figure 2).

That's $38,211 in circulation for every ounce of gold in reserve! Of course, it's even higher nowadays. The printing presses are cranking faster than ever in 2010. Only now, it's much harder to know how big the actual money supply has gotten as the number was so embarrassing that the Fed stopped to publish the “M3" measure in 2006.