For those who follow the economy and financial markets, recent highs in gold suggest that the precious metal has become popular among investors looking to protect their wealth from a depreciating US Dollar. While gold has seen large gains over the last decade, rising from lows of around $275 to a recent high of $1050, some analysts believe it is nowhere near the ‘real’ high when the price of gold is adjusted for inflation as discussed in Gold at $2,000 still below 1980’s 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 October 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 US Department of Labor’s inflation calculator.
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“Gold is not at any peak,” said Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth Inc., which manages $58.5 billion in mutual funds and brokerage accounts.
“The world’s money supply has increased and gold hasn’t kept pace,” he said. “We’re now in a period where gold is catching up.”
Most mainstream economists suggest that the reason for the rise in the price of gold, especially in the last couple of years, can be attributed to fears of inflation as the US government spends and prints trillions of dollars. While inflation may be an effect of excessive money printing, investors should take notice that gold doesn’t necessarily rise during periods of inflation, with proof being the lows reached during the 1990’s, when inflation was rising and gold remained in the $300 range for the better part of the decade. During the great depression of the 1930’s, gold stocks rose exponentially while the US was in a period of rampant deflation and prices of other goods collapsed.
So what does drive the price of gold up and down? Contrarian economists often argue that inflation and deflation are simply an effect of deeper rooted problems, often arising from monetary, fiscal and political policies of the government. When investors begin to lose confidence in their governments, the price of gold benefits. As an example, the price of gold is not rising in just the United States, it is rising all over the globe, in every currency. This suggests that gold is responding not necessarily to inflationary pressures, but rather, to a continued deterioration in the confidence of governments around the world to mitigate the global economic crisis.
For those wishing to preserve wealth, this consideration should be made when looking at investments that protect the buying power of the US Dollar. If the Great Depression and the early 1980’s are a guide for where capital concentrates during economic collapse, then gold will be an excellent investment / wealth preservation tool.
Submitted by Mac Slavo
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