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Inflation, Gold, and Other Commodities

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  1. Inflation, Gold, and Other Commodities By Bill Garvey December 1st, 2010

  2. Outline • Inflation basics • What is inflation? What causes it? • How is inflation measured? • Gold as an investment • What is the connection? • Other inflation calculations • Gasoline • Minimum wage

  3. What is inflation? • Rise in the general level of prices • Diminishes purchasing power • Long run causes: • Money supply (demand-pull) • Rise in production costs (cost-push) • Low, steady rate is preferred

  4. How is inflation measured? • Consumer Price Index (CPI) • Measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services • Market basket – grouping of about 300 consumer goods and services that are purchased by typical urban consumer • Compiled on a monthly basis by Bureau of Labor Statistics (BLS)

  5. Inflation calculations • How can we figure out how to adjust for inflation over a period of, say, 50 years? • Example: • A TV has a value of $1000 in 2009 dollars • Know that inflation was 4% from 2008 to 2009 and 3% from 2007 to 2008 • What is the value of the TV in 2007 dollars?

  6. Gold as an investment • Why invest in gold? • Commonly viewed as a hedge against inflation, market declines, and currency failure • Increase diversification • Maintain returns, decrease volatility • Reduce wealth at risk over a given period • In summary: gold preserves wealth

  7. Gold or stocks?

  8. Gold or stocks? • Answer: It depends. Timing is key. • Best route is through diversification.

  9. Dow Jones to Gold Ratio

  10. Is Gold Really a Hedge Against Inflation? • Calculated inflation adjusted prices of gold from 1968 to 2009 • It was illegal to own gold in anything but small amounts from 1933 to 1967 by Executive Order 6102 • Compared these inflation adjusted prices to the inflation rate

  11. Is Gold Really a Hedge Against Inflation?

  12. Gasoline • Examined the nominal and inflation adjusted price of gasoline from 1949 to 2009 • 1949 price was $0.27 • 2009 price was $2.35 • When do you think the highest inflation-adjusted price of gas was?

  13. Minimum Wage • Became law in 1938 at $0.25/hour • Current minimum wage is $7.25/hour, although some states have set their own higher • When do you think the inflation adjusted minimum was highest? (Hint: the answer will surprise you)

  14. Works Cited • http://en.wikipedia.org/wiki/Inflation • http://en.wikipedia.org/wiki/Gold_as_an_investment • http://en.wikipedia.org/wiki/Consumer_price_index • http://inflationdata.com/inflation/ • http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx • http://www.usinflationcalculator.com/interest-rates/long-term-inflation-target-of-17-to-2-set-by-fed/1000388/ • http://www.dol.gov/whd/minwage/chart.htm • http://www.measuringworth.com/gold/ • http://www.eia.doe.gov/emeu/aer/txt/ptb0524.html • http://www.google.com/finance?q=INDEXSP%3A.INX • McConnell, Campbell R., Stanley L. Brue, and Sean M. Flynn. Macroeconomics: Principles, Problems, and Policies. 18th ed. New York: McGraw-Hill Irwin, 2009. Print. • http://gold.approximity.com/since1968/DJIA-Gold-Ratio.html • Artigas, Juan C. Gold: Hedging Against Tail Risk. Rep. World Gold Council, Oct. 2010. Web. 26 Nov. 2010. <http://www.marketknowledge.gold.org/>.