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« Sell Now, Buy Later – the ABCs of Short Selling | Main | Strong Auction Demand in Greece, Euro Steadies, Dollar Weakens »

Gold in Perspective

Gold, Inflation Adjusted.jpg

By David Galland, Managing Director, Casey Research

As the price of gold rises and the inevitable quacking begins again about the “barbaric” metal being overvalued, I thought a quick check-in with the historical perspective might prove useful.

The first of two charts that follow shows the long-term picture of gold from 1970 to the present, correctly adjusted for inflation.

In the second chart, we overlay the inflation-adjusted price of gold from the last secular gold bull market in the 1970s, with the secular bull market we’re now in.

Gold Still Looks Cheap When Adjusted for Inflation.jpg

As you can see, if the current bull ends with the sort of grand finale we saw at the end of the last big blow-off, then prices have a long way to go from here. That said, a credible case can be made that this time around, the price could go much higher.

Percentage of the Population Unemployed 27 Weeks and Over.jpg

For starters, in the 1970s, though not good by any means, the economy was in much better shape than it is today. The chart here uses long-term unemployment as a proxy for that contention.

As you can see, at the end of the 1970s, the employment picture was quite healthy. 
Today, in addition to wildly out-of-control debt on both the private and public levels, we have a massive problem with unemployment and the consequences of a burst housing bubble. Thus, Paul Volcker’s somewhat simplistic solution to inflation – and the trigger for the end of the last gold bull market – seriously ratcheting up interest rates, is off the table. (Since we’re trying to gain perspective, I’ll remind you that at the beginning of the 1980s, mortgage rates topped 18%.)

But wait, I heard someone in the back shout, “There is no inflation today!” Wrong, there is unprecedented inflation – properly defined as an increase in the monetary base. What’s missing, so far, is the inevitable consequence of the inflation – steadily rising prices.

That will come, and when it does, the government will find it is going into a gunfight with a (dull) knife – because raising interest rates in the Kingdom of Debt will lead to a predictable outcome.  

Unfortunately, thanks to the inflation, interest rates are going up no matter what the government would prefer to happen, a contention of ours that is now gaining traction in the mainstream.

And, yes, up to a point, history shows gold and interest rates moving upwards in concert.

Don’t go crazy about buying gold, but by all means, if you don’t own some, begin a monthly program of purchases.

While it would be perfectly natural to see the gold stocks give back some of the big gains they have offered since last year’s correction, any further corrections should be viewed as opportunities. But again, don’t go overboard. If you have an investment portfolio with 20% to 30% in a combination of precious metals bullion, large-cap and small-cap stocks, you’ll be well positioned – and protected – for what’s coming. 

To learn where to buy physical gold and where to store it… and which major gold stocks, mutual funds, and ETFs are the safest while giving you handsome upside… read Casey’s Gold & Resource Report. At $39 per year, it’s a steal for the value you get out of it. Click here for more.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

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Reader Comments (4)

Great charts. Just one thought. I think we're all conditioned to believe that all parabolic moves will automatically be corrected by a countermove back to the bottom of the mountain, so to speak. That's certainly how it almost always works out and I can easily conceive of how it could happen just like that. And it'd be darned hard not to place you bets that way.

But Jim Sinclair, for one, thinks that gold won't ride back down materially after it goes up sharply. It will plateau at a high level.

Maybe it's not about what the price of gold will do, per se, but what the Powerz can manage to do to rehabilitate their toilet paper currencies after they go poof. Seems to me that rehabilitation and confidence re-building will require the discipline of gold or some other resource backing. Can't see how that'd be bad for gold, as it becomes recognized more or less officially as money again.

One thing's for sure, an earth shattering re-rating of things real and tangible is coming vs. things paper and promised as the con games within con games unravel.

April 15, 2010 | Unregistered Commenterfallingman

Dear Editor. The unprecedented and continuing amount of fiat printing is exactly the very reason why one should go overboard in purchasing gold, silver, property, land and any other hard asset one can find. Bond market holders will steadily lose real value whilst the stock market is little more than a Las Vegas gambling saloon on a world wide scale. Any thoughts that the shareholders actually own the company is a laughable lie promoted by central bankers and their supportive manipulating and lying governments. Any thoughts that the inflation figures issued by the officials of these same governments represent the real rate of inflation is clearly a sick joke to anyone who examines the facts in the real world. Roger.

April 15, 2010 | Unregistered CommenterRoger Levinson

Lets focus on the second chart for a second because Casey is overly optimistic when it comes to the historic trend in Gold.

I would not say that gold is priced cheaply based on the average price of gold in a year. The peak in the 1980's was just that, a peak of the bubble. And it came down just as hard as you can see.

I think it is more prudent to say that gold is fairly valued at around $1000 an ounce. With the outlook of massive inflation ahead, due to QE, it is fair to say that prices are still very low and will be much higher in the future. But cheap following the average price trend of history? Definately not.

Following Keynesian logic, you will see inflation and a rising price of gold. But if Japan is your example, don't expect savings to be flowing into gold all of a sudden. The US needs savings for 'Build America' bonds. For now the Asians are crazy enough to supply their wealth to the US. Do I hear a demographic argument catching up soon? You bet.

From a bubble perspective like Hedgefund manager Soros is saying, then you can argue that gold is cheap at current spot price.

There's a difference in the historic perspective and the future outlook that is being mixed here. One should be wary not to speculate in an asset class that is meant to secure your wealth. Only gold bulls will want to see a bubble in gold, so they can cash out and live happy ever after.

For the diversified investor, it would be wise to allocate efficiently and not step into the realm of bubble speculation. Enough wealth has been squandered by bubble talk in the last 10 years in NASDAQ, Housing and now Gold.

I say gold is fairly valued from an historic trend perspective. From a money supply perspective it is severely undervalued in my opinion. Problem is that banks and households are deleveraging and money is hoarded in a balance sheet recession.

As long as the world turns on Keynesian style reflation, gold is a protection against inflation. As soon as they become educated by Austrian economics, the game changes once again, unless we turn to barter practices.

Just my 2 cents.

April 15, 2010 | Unregistered Commenterde Graaf

de Graaf,

The bartering idea is a real possibility depending on your job. Some of us are stuck in that we receive a cheque and are taxed at source, etc. However, for those who can trade their services in return for other services they can to some extent drop out of the system. We have always had a black economy, its now a question of just how big it can become.

An Italian friend of ours is of the opinion that in Italy the black economy is bigger than the white economy, just his opinion mind.

April 15, 2010 | Unregistered CommenterGold Prices

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