In 2005, oil was $65 a barrel. Gold was $513 an ounce. Thus, a barrel of oil could be bought for 0.127 ounces of gold.
Today, with oil at $127 a barrel and gold at $887 an ounce, a barrel of oil can be bought for 0.143 ounces of gold.
So, in nominal dollars, oil has gone up from $65 to $127 a barrel—a 95% increase. But when measured in gold, the price of oil has gone up a comparatively scant 13%. If we paid for our oil and gas with gold instead of with unbacked paper dollars, the price at the pump might be $2.20 instead of $4.20 and rising.
But is this a sensible comparison? Why should we compare the price of oil to gold rather than wheat or pork bellies or comic books? The reason: before August 15, 1971, the U.S. dollar was backed by gold. Since that time, the dollar has lost 81% of its purchasing power, according to the government’s Consumer Price Index, or 96% of its value when measured in gold.
When the U.S. dollar was backed by gold, there was a limit to how many paper dollars could be created. After all, the Treasury Department had to exchange an ounce of gold for every $35 on demand. Thus, the government and its central bank could only create dollars for which there was sufficient gold to make future exchanges. But with President Nixon’s closing of the “gold window,” the government and banks had no more restraints—they could create as many paper dollars as they wished. And they have.
When the Federal Reserve creates more money, it diminishes the purchasing power of all outstanding dollars. There are more dollars competing for the same amount of goods thereby causing prices to rise. While increased demand for oil from China, India, and the rest of the world have caused a real price increase of 13%, the remaining 82 percentage points of increase are directly attributable to the expansion of the money supply.
I was at an Easter party earlier this year, and my aunt told me she was going to use President Bush’s “stimulus package” to fund a cross-country road trip. She said the stimulus would help with the price of gas. I said, “The day those checks start arriving, the price of gas is going to soar.” It did. And yet the news media rarely, if ever, point their fingers at the real culprits: the federal government and its central bank, the Federal Reserve.
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The only problem with your analysis is that is presumes that as more goods and services are created by burgeoning population, technology, and trade, more gold will be discovered at the same pace, or that there is some kind of correlation. And if money does not increase at the same rate, then you have deflation, the psychological effects of which are devestating- those without money are better off hoarding than spending or investing then.
Does it even make sense to tell the new entrants to the world economy to “bring your gold” so they can participate? If you want to try to fix money value to a precious commodity, figure out an “energy” metric that would total oil, solar, wind, coal, nuclear, and every other current source, and peg money supply to that- at least that makes some sense.