The Case for Pricing Gold in Gold

People won’t stop chattering about gold hitting new record highs. Especially Matt Drudge. He has had headlines on his sites, seemingly, every day, about gold’s ascension.


The NYT argues today that we have it all wrong. Gold isn’t at new highs, at least not in inflation-adjusted terms. Here is the usually reliable David Leonhardt:

Gold is at a record only if you fail to adjust for inflation. And you should almost always adjust for inflation. Otherwise, you end up with a series of meaningless records — Gold reaches record high! Oil reaches record high! Lettuce reaches record high! — that depend on the fact that a dollar in 2010 does not have the same value as a dollar did in, say, 1980.

More than a month ago, Ryan Chittum of Columbia Journalism Review noticed the epidemic of alleged gold records and urged those of us in the media to stop. The actual record was set 30 years ago, when the price of gold, in today’s dollars, hit $2,318 — or 65 percent higher than it closed on Monday.

This isn’t simply a question of math. Anyone who says gold is at a record high (or who said oil was several years ago) is getting the story wrong. Why? Because $10 today is not more valuable than $9 a few decades ago. Claiming otherwise is tantamount to saying that 10 rupees is more valuable than $9 because 10 is a bigger number than 9.

Fair enough. But it’s worth pointing out at least two things. First, we are inconsistent in this pedantic fondness for pricing things in real versus nominal terms. Sometimes we do, but mostly we don’t. Would it be be better if we always did? Sure, but we live in a nominal world of prices not a real one.

Second, and this is more structural, doing inflation-adjustments in a rapidly-depreciating currency is something of a mug’s game. The dollar is a troubled currency, and has been increasingly so. We should be very careful about making broad statements wrt inflation-adjustments in such a currency, in something the same way we wouldn’t do inflation adjustments, in say, Zimbabwean dollars in the mid-2000s.

I’m not saying it’s wrong to baseline gold prices, because it isn’t, but I am saying we should turn down some of the silly “record” rhetoric. I am annoyed at how selective this “real” rhetoric is, as well as how, in its pedantry, it misses important structural changes in currency markets. There are some who might argue we have this all backwards, that we should be pricing dollars in gold — gold in gold, so to speak — not the other way around.

Will gold be the reserve currency of the future? Highly doubtful, as The Economist makes the case here, but it is a way-station that should be treated more sensibly than simply being discounted by a troubled dollar.