What's the influence of inflation on gold price (NOT the opposite)?
Answer:
Gold has historically been used as a hedge against inflation. This means that as inflation increases, so does the price of gold. Here is why.
Lets assume that gold is a scarce resource (not that big of an assumption). Money, on the other hand, is not, as more of it can be printed and placed into circulation. Inflation by definition is when money is placed into the economy at a faster rate than other goods, thus driving up the price of these other goods. To understand this, here's a quick example. If you have 2 donuts and 2 dollars in the economy, then the price of a donut is $1. If you double the money supply, inflation has occurred and the donut now cost $2.
Gold is scarce, meaning that it is limited. Thus, as more money is placed in circulation and thus that particular currency weakens in purchasing power, gold increases in purchasing power, meaning that it takes more currency to purchase a piece of gold. Thus inflation causes the price of gold to go up.
Increasing inflationary tendencies has the effect of driving gold prices higher. This correlation has existed ever since the word inflation was invented. Gold prices have been increasing significantly due largely to the FED's overproduction of dollars.
Gold prices would be much higher had the Nixon administration not discontinued the US policy of backing our currency with gold. At the time, some countries were turning in their dollars for gold, and the fear was the US would run out of gold. The Nixon move essentially turned the dollar into a fiat currency which is backed only by the full faith and credit of the US government.
Since then, the US government has produced dollars to pay for Federal deficits, war obligations, tax cuts and the balance of trade deficit. Many in the US and the world are fearful of a dollar collapse, and subsequently there is a rush on to purchase gold. Its sad, but the US economy is extremely vulnerable due to the excesses of the FED and the US government.
IN inflationary periods; real asset prices go up in relation to the dollar; so inflation causes gold prices to go up.
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