Wednesday, October 21, 2009

Gold Still Far Below 1980 Inflation Adjusted Peak

If adjusted for inflation, then gold is not near the 1980 peak, which would be over $2000 in today's dollars. With the Federal Reserve still unable to raise interest rates to fight the risk of inflation, gold's current upward cycle could continue. See the following post from Expected Returns for more on this.

From Bloomberg, Gold at $2,000 becomes inflation-adjusted bullseye for '80 high:
Gold’s rally to a record means prices are still 53 percent below the 1980 inflation adjusted peak.

While gold rose 19 percent this year to $1,072 an ounce on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator.

When speaking in terms of real, inflation-adjusted dollars, it's easier to understand the argument that gold is still cheap. Note that these inflation adjustments are based on government statistics of inflation, which are understated.

Gold Bears

“If you bought gold in the 1980s, you’re still losing money today,” said Zeman, a metals trader.

Gold prices in New York languished for two decades after declining from the 1980 record, dropping to a 20-year low of $253.20 on July 20, 1999. While bulls say gold is cheap, the inflation-adjusted price is 15 percent above its 30-year average, Bloomberg data show.

The Federal Reserve may limit gains by raising interest rates before inflation balloons, analysts said. Fed Chairman Ben S. Bernanke said on Oct. 8 that policy makers will need to raise interest rates “at some point” to control inflation

This is the argument you hear most often from gold bears. Of course if you bought gold at its absolute bubble peak in 1980, you wouldn't be doing well. Most people assume that "gold bugs" are always bullish on the yellow metal. In fact, the smart money in gold knows that gold, like any other asset, moves in cycles. We just happen to be in a powerful upward cycle for gold.

Concerning interest rates, the Fed has its back against the wall. Our economy has become so dependent on artificially low interest rates and government stimulus that raising interest rates anytime soon would be disastrous for our economy. Any talks of raising rates to contain inflation must be viewed as mere jawboning. Historically, inflation has always been the means by which governments attempt to escape the burdens of debt.

This article was republished from Moses Kim's blog, Expected Returns.

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