The Economics of Gold

Abstract

From day to day or month to month, the price of gold can swing violently. But over much longer time spans, gold holds its real value rather well. This paradox is explored in this paper; it is explained by the notion that a well informed market should overreact to news about the fundamentals governing its long run value; and then, in the absence of further shocks, the price and stock of gold in use should tend to drift in opposite directions until the long run point of balance is attained. The paper also investigates other issues concerning gold, including the suggestion that paper currency should be backed by gold.