There is very little, if any, effect on the economy from the price of gold. If anything, the opposite is usually true: perceptions about the economy can directly affect the price of gold. The usefulness of gold as an economic indicator is questioned by some, but it is still widely recognized as a hedge against the U.S. dollar and as some measure of inflation. Gold is used in most electronic devices such as computers and cell phones, but in such small quantities that fluctuations in the price of gold have very little impact on this sector of the economy.
Gold and Inflation
Traditionally, the price of gold was seen to reflect monetary inflation, that is, inflation of the money supply. Because the fractional reserves banking system under the Federal Reserve is inherently inflationary, the total amount of money in circulation tends to expand, at times rather sharply. If monetary inflation exceeds real growth in products and services, then the result will be price inflation, which is what is measured by government measures of inflation such as the Consumer Price Index (CPI) and Producer Price Index (PPI). The balance of supply and demand for gold tends to change relatively little from year to year, so, for decades; changes in the price were attributed to inflation. Because rising inflation often coincides with a booming economy, a rise in the gold price is sometimes coincident with a strong economy.
Gold and the Dollar
In a sense, the value of the dollar reflects the health of the US economy. However, in a floating currency system where the dollar is only priced relative to other floating currencies, it is increasingly difficult to use currency movements as a measure of the economy. Still, gold is a very popular hedge for large institutions against devaluation in the US dollar. As the value of the dollar goes down relative to other major currencies, the price of gold tends to move higher, though the correlation is not always... [continues]
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