Gold Cannot Be Inflationary, but the Dollar Sure Can


"If you can't meaningfully create gold, it cannot be inflationary."

I have referenced a chart from the St. Louis Fed in several articles this week that shows just how much currency is being printed right now. Every time I look at it, I chuckle and shake my head. The line in 2008 is nearly vertical!

Look, if you try to make things complicated, you'll succeed. But there's no reason to do that. Here are a few key things to remember:
  1. If you increase the supply of dollars, you had better increase demand for those dollars at the same rate—or an even greater rate—or those dollars are going to lose value. Period. Granted, there has been some increased demand for dollars in recent months, but can you honestly tell me that demand is sufficient to outpace the number of dollars being printed? Furthermore, do you honestly see sustained or increasing demand for those dollars? If so, why? We're a debtor nation that manufactures almost nothing.

  2. If you are unable to increase the supply of gold in any sort of meaningful way (which you can't), and you are making an argument that the price if gold is going to fall, you had better also make a strong argument that demand for gold is going to fall. I say this, because you cannot predicate any argument for the price-destruction of gold using supply as a premise. In other words, supply of gold can't be increased, so if the price is about to fall, you better convince me it's going to result from reduced demand—because it sure as hell isn't going to come from an oversupply.
If you can't meaningfully create gold, it cannot be inflationary. The only definition of inflation is an increase in the money supply.

Didn't I say something about avoiding complication earlier in this article? Here's the simple part.

The supply of dollars is increasing. Prices and rates are going to rise unless the Fed can miraculously find a way to bring all those dollars back in, very quickly. But how could they possibly achieve that? Are they going to borrow more? Are they going to print more money? The problem is so obviously and viciously unsolvable that I'm not quite sure how anyone thinks the dollar can survive.

Meanwhile, the supply of gold in the economy is not increasing. If anything, it's being hoarded, which translates to increased scarcity. Does somebody want to tell me how the government (or anyone else) plans to print more gold?

The supply of dollars is increasing. So the dollar is losing value. The supply of gold is, at best, stable, but probably shrinking. And here's all you have to think about: would you bet that demand for dollars is going to outpace its production? And would you bet that demand for gold is going to fall in the face of a stable or declining supply?

Related Articles

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe