The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 53

Gold: The Litmus Test for Commodity Prices

How tightly are U.S. commodity prices tied to those of other Western economies? More so than most folks imagine—much more. And they always have been. This chart shows how similarly inflation ran through the United States and its trading partners in and around the huge inflationary spiral of World War I.

Prices is the key word here, and this chart looks at the prices of 40 basic commodities in nine countries—all from 1913 through 1937, but expressed in gold, not dollars or local currency. This minimizes the effect of differences in the amount of short-term monetary inflation in each country. Note how the prices all tend to go up and down almost precisely in unison throughout this 24-year period. The nine lines look almost like one. While war-generated inflation raged throughout the Western world to varying degrees, the real, inflation-adjusted, prices of commodities varied almost not at all from country to country. The key to the cohesion of prices among the nine countries was that gold is the price-measuring tool in this instance.

Perhaps the most interesting point in that not one of the nine countries avoided the post-World War I inflationary spiral. But why so much conformity 60 years ago? As with stocks and interest rates, even in earlier decades prices tended to move together. Despite the modern fads that lead folks to believe they can diversify by investing overseas, that view really isn't realistic. Prices rise and fall ...