It seems I hear that the price of gold is at all times highs almost every day. While in dollar terms this statement appears to be true, it just doesn’t hold water when you compare it in “real value” terms. What I mean by this is, that when pricing anything in terms of a “fiat” currency like the dollar you have make adjustments in the value of that currency based on its current purchasing value. As an investor you must always consider real valuation in current “real” terms and what is the likely hood of the current “real” terms to be over the coming years.
Figure 1 shows the inflation-adjusted value of gold since 1970. I am not saying that gold is not trading at a premium compared to historic prices. I am fully aware that it averaged $1,630 in August. However, in inflation-adjusted terms, gold is 12% below its 1980 peak.
Inflation in 1980 hit 15% year-over-year, and inflation today is running much lower so some may question the validity of comparisons to 1980. However, there are many problems with comparing our current rate of inflation to that of 1980 because of the way in which it is figured shows no resemblance what-so-ever in how it was calculated in 1980. With this said, I believe our current rate would be higher if in fact it was calculated the same way today as then. Further, I believe inflation over the next several years is likely to be higher than it has been over the past 20 years, but not one of us can predict the level we will actually see, because of current unprecedented dismal growth, trillion dollar deficits, and the money printing machine of the FED. With all these factors at play for the foreseeable future, our risks appear to be much higher than they were in 1980 for inflation to get out of hand.
The bottom line…in my opinion, any investor not buying or holding gold and gold rare coins is ignoring one of the greatest opportunities of our generation.