Gold – After Inflation, What Is Left?

The closing price for spot gold in New York Friday was $1915. Forty-three years ago, in May 1980, gold was priced at $515.

Being somewhat generous, and since gold has been higher (above $2000) recently, we might say that the gold price has quadrupled over those forty-three years.

A total profit of some three hundred percent sounds okay. The rate of return is 3.1% annually. That might not be too bad if you can look past the volatility one had to endure during those forty-three years.

Unfortunately, those are nominal returns. The effects of inflation must be factored in. Doing so wipes away any ‘profits’.

In inflation-adjusted terms, gold at $1915 today is identical to $515 in May 1980.

In other words, absent the effects of inflation since 1980, gold would still be $515 oz. Would that make a difference?

WHAT’S THE DIFFERENCE?

Actually, there is no difference.  An ounce of gold today has the same purchasing power at $1915 oz. as it did at $515 oz. in 1980.

The same inflation effects that caused the price of gold to rise four-fold also resulted in a similar four-fold increase in the cost of goods and services since 1980.

Example… In 1979 the average price for one gallon of gasoline was $0.86. The following year it was $1.19.  The average for the two years is $1.03.  I paid slightly over $4 per gallon when I filled the tank yesterday.

Example… The average price of one loaf of white bread in 1980 was $.51. Currently, the price is $1.98 – a four-fold increase since 1980.

UNREALISTIC EXPECTATIONS

After stripping away the effects of inflation, you are left with one ounce of gold. Its price is irrelevant. (see The Price Of Gold Is Irrelevant – AUDIO)

Over long periods of time, gold retains its purchasing power. To expect more from gold is unrealistic.

Gold is original money. Its higher price in dollars reflects the loss of purchasing power in the U.S. dollar that has already occurred.

Gold’s higher prices come in hindsight and infrequently. The biggest moves upward in the gold price occur in catch-up fashion to reflect the effects of inflation that have already occurred.

SCENARIO – CONCLUSION

Gold is not an investment, nor is it the next big thing. Gold is real money and the original measure of value for everything else.

At close to $2000 oz., gold is adequately priced to reflect the ninety-nine percent loss of purchasing power in the U.S. dollar that has occurred over the past century.

The gold price can go much higher, of course; but it will only do so to the extent that the dollar loses additional purchasing power; whether in very rapid fashion, or over a protracted period of time.

A similar drop in U.S. dollar purchasing power as described earlier in this article could take the gold price up four-fold from its current level. That would mean a gold price closer to $8000.

That would also mean that prices for everything else (the cost of living) would rise four-fold, too. The purchasing power of one ounce of gold remains the same.

Gold can provide compensation for you from the dollar’s loss of purchasing power – over time, eventually. To expect more than that is unrealistic. (also see Gold Is Literally Priceless)