Gold and Inflation - A Rational Look

The rise of gold from some $250 an ounce in 2000 to over $500 an ounce in 2005 has set off another wave of interest in the shiny metal. The challenge for novice investors is to sort the mythology of gold from the cold-hard facts of its investment value. Two recent articles take a rational look at the current state of the gold market.

James Hamilton at Econobrowser notes that since 1970 gold has not been a particularly good proxy for consumer inflation. In addition he draws the distinction between this commodity and income generating assets like real estate and TIPs. If an investor has a firm belief in unexpectedly higher inflation then,

..if you did want to bet on inflation, there are better vehicles out there for doing so, such as going short 10-year bonds and long on inflation-indexed securities.

The gold bugs are never at a loss for reasons why the metal should be a significantly higher prices. However, an article by Michael R. Sesit in the Wall Street Journal notes there may be much more mundane reasons for the recent run in gold:

“The recent increase in the price of gold can be attributed to growing demand in a market in which supply has not increased nearly enough,