It has been pointed in out in the media that one of the initial reasons that gold goes up is because the currency it is priced in (U.S. dollars) is experiencing devaluation.
In other words, the purchasing power of the U.S. dollar is falling, causing more units of money (quantity) or a higher price, needed to buy gold. This is also known as currency debasement, a.k.a. inflation.
However, there is not a one-to-one causal ratio between currency devaluation and the increase in the price of gold as denominated in that same currency.
For example, the price of gold in U.S. dollar bills has increased from a low of $257 in 2001, to a recent high of $475.50 in 2005. This represents an increase of approximately 86%.
During the same 4-year span of time (2001-2005), the U.S. dollar has fallen approximately 33%. This means the price of gold has gone up 2.6 times more compared to the rate the dollar has gone down. Clearly there is more involved then just the existing devaluation of the reserve currency.
