A basic cornerstone of economic literacy is the distinction between nominal prices (in dollars) and real (relative) prices. Those writing recent headlines about the price of gold clearly don’t get it:

● Forbes: “Gold price reaches 23-yr high”

● Scotsman: “Gold sets the standard in 23-year high”

● LA Times: “Gold Closes at 22-Year High of $502.50”

These headlines misleadingly suggest that $500 today is a price as high in some relevant way as $500 in 1987. It isn’t: as I noted on Wednesday, the dollar is worth quite a bit less today. Consumer prices have risen 75% since 1987; the dollar has lost 43% of its purchasing power.

What we should be paying attention to is not the nominal, but the real price of gold. And though the real price isn’t yet unusually high by historical standards, it has – as Raymond Weklar rightly points out -- nearly doubled in the last four years. That movement is worth pondering.

Since the last remnants of the gold standard were removed in 1971, investors have looked to gold as an inflation hedge. The real price of gold peaked as the inflation rate peaked around 1980 (useful graph here; hat tip to Newmark’s Door). It ebbed 1980-2001 as central banks seemed to have learned to keep their inflationary tendencies under control. The upsurge in gold over the last four years suggests that that investor confidence may be slipping again – and not without good reason. As Bloomberg reports:

So far this year, consumer prices are rising at a 4.9 percent annual rate compared with a 3.7 percent increase at the same time last year.