Summary
The last time that gold reached an all time high price, prior to last week, was in 1980 when its price reached $847 per troy ounce. Since then inflation has taken the 1980 dollar to $2.67 in 2008 dollars; this means that for gold to sell today at the same price it reached in 1980 it would have to be priced at $2228 per troy ounce. Since gold, last week, only reached a price of less than $950 (2008) and has since dropped back to the $900 (2008) level it is clear that gold is not a hedge against inflation nor is it a store of value. It is, in fact, a jewelry manufacturing material, which is now already too expensive to be used in a pure state. It is possible that within a few generations gold will only be remembered as a once important means of exchange once used on account of a perceived and generally agreed upon and accepted intrinsic value
Analysis
Gold is simply not enough in demand, in reference to its supply, for its price to remain locked to the US dollar as a store of value.
European central banks are selling gold, not buying it, because its price in Euros is flat and has been for some time.
The major nations of the world went off the gold standard, where they would guarantee to redeem their currencies in fixed ratios of gold to their paper, in the worldwide depression of the 1930s.
It took three generations, but we now seem to have reached the point in the world's history where, for the first time, gold is valued only for jewelry use and speculation. The metal today has rapidly diminishing monetary use; its price is too volatile for even its sovereign bullion coins to be used in ordinary exchange transactions, and bullion coins of the few nations still producing them are arbitrarily marked with very low values to discourage their use altogether except as collector tokens. Gold is used in no critical (non-substitutable) industrial or medical applications of any consequence at all.
A generation ago the recent announcement that in 2007 China had passed the Republic of South Africa as the world's largest producer of new gold would have been 'big' news. Now it hardly matters at all, and the simple fact that much of the gold produced in China is a byproduct of the mining of tungsten, copper, and molybdenum, each of them a truly precious industrial metal, is not even mentioned in the aforesaid reports nor is the fact that a downturn in the production of any one of them for any of the usual reasons, labor strife, power outage, mechanical accident, and so on and so forth, could immediately topple China from its new 'top gold producer' perch.
The strong 'fiat' currencies of the modern world are issued by nations which, as the US used to do before eco warriors stopped the mining industry in the US, produce metals, minerals, and energy. These currencies are considered to be backed by baskets of commodities. The currencies of nations such as Canada, Australia, Brazil, Russia, and China benefit directly from the natural resources produced in those countries or controlled by them. Each day fewer people care about the amount of gold reserves of a country and more care about the country's production, ownership, and control of a broad group of industrially important natural resources.
Anyone who today thinks that gold is a hedge against inflation simply cannot do the mathematics of inflation and currency exchange rates.
