Monday, May 23, 2011

Major currencies vs. gold

This chart is a companion to my previous post on the yen, since it illustrates how much stronger the yen has been than either the dollar or the euro (and by extension the DM). The red and blue lines show the price of gold in dollars and euros, respectively, while the gold-colored line shows gold priced in yen. Both axes have the same span: 15 to 1.

Note how gold has yet to hit a new high against the yen, whereas gold has almost doubled in dollar terms from its 1980 high. Note as well how the yen strengthened powerfully against gold in from the mid-1980s through the early 2000s, and how this correlated to Japan's very low (and even negative) inflation from the early 1990s through today. As Milton Friedman taught us, monetary policy acts on inflation with "long and variable lags."

Note also how major currencies have followed a similar pattern vis a vis gold—falling in value in the inflationary 1970s, rising in value in the disinflationary 1980s and 1990s, and falling in value in the 2000s. For gold bugs, this chart provides a good reason to believe that inflation in the U.S. and in the Eurozone will be substantially higher in coming years than it will be in Japan, even though the chart also shows that all currencies are depreciating against gold. In other words, gold is telling us that inflation is likely to rise in all countries, but much more so in the U.S. and Europe than in Japan. It will certainly be interesting to see how this plays out in the years to come.

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