Outpaced gold’s rally remains 53% below 1980 inflation-adjusted high
GOLD’S rally to a record means prices are still 53 percent below the 1980 inflation-adjusted peak. While December gold futures rose 19 percent this year to $1 072 (R7 989.69 at Friday’s exchange rate) an ounce on October 14 in New York, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion has not kept pace with the cost of bread, fuel or medical care.
In 1980, gold hit a then-record of $873 an ounce. In today’s dollars, that would be $2 287, according to the US Labor Department’s inflation calculator.
Record government debt and interest rates close to 0 percent are pushing gold higher for a ninth consecutive year, and options show investors expect the rally to continue. When prices reached all-time highs the contract with the most open interest was the December call to buy the metal at $1 200. The contract to purchase at $1 500 an ounce was the third biggest.
“Gold is not at any peak,” said Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth, which manages $58.5 billion in mutual funds and brokerage accounts. “The world’s money supply has increased and gold hasn’t kept pace… We’re now in a period where gold is catching up.”
The US Dollar index, which measures the currency against those of six major trading partners, fell on October 15 to the lowest level in 14 months, and has dropped about 7 percent this year.
President Barack Obama has increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.
Gold bulls say today’s record borrowing and low interest rates mean the government will have to accept faster inflation as the economy recovers. Investors buy bullion to preserve value during times of turmoil and economic stress.
Financial institutions worldwide have reported credit losses and writedowns of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.
“Gold is the hedge against currency devaluation,” John Brynjolfsson of hedge fund Armored Wolf said on October 7. He predicted bullion would top $2 000.
Banks have raised their gold estimates. On October 9, JPMorgan Chase said the metal would average $1 006 an ounce next year, compared with an earlier projection of $950. Deutsche Bank forecast an average of $1 150, up 32 percent from its estimate in July. Barclays Capital said on October 12 that “prospects for a run at $1 500 should not be underestimated” next year.
Gold would need to rise more than sixfold to top the 1980 record, using a more accurate inflation-adjustment, said John Williams, an economist and the editor of Shadowstats.com. He said the government had understated the cost of living over the past two decades with adjustments in the way it measured the basket of goods and services monitored by the US consumer price index (CPI).
“If the methodologies of measuring inflation in 1980 had been kept intact, gold would have to hit $7 150 to be the equivalent of the 1980 record,” Williams said.
The cost of living in the US rose 0.2 percent last month, the Labor Department said. Compared with a year earlier, consumer prices fell 1.3 percent. The CPI would drop 0.5 percent this year, before rising 1.9 percent in 2010, reflected by the median estimates of 61 economists in a survey.
Annual increases averaged 2.8 percent a year in the past decade.
In March 1980, inflation surged to a 14.8 percent annual rate, two months after gold capped a four-year rally. Adjusted for the decline in the dollar’s purchasing power since then, December gold future’s October 14 record of $1 072 represents the equivalent of $409 in 1980 dollars, the Labor Department calculator shows.
Since January 1980, the average price of 1 pound (453.59g) of white bread has risen almost threefold, from about 50c to $1.38 in August, and medical care has surged more than fivefold, Labor Department figures show. Gasoline and electricity prices have more than doubled.
Today, the gap between gold’s spot price and its CPI-adjusted equivalent is the widest ever.
Gold had not been as effective a hedge against inflation as oil since the 1980s, said Matt Zeman, of LaSalle Futures Group in Chicago.
Crude passed its 1981 inflation-adjusted record two years ago. The cost of imported oil averaged $39 a barrel in February 1981, after Iran cut exports, according to the Energy Department. That is $89 in 2007 dollars, the Labor Department calculator shows. Oil reached a record $147.27 on July 11 last year, and touched a one-year high of $82 a barrel on Wednesday in New York.
“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, data shows.
The Federal Reserve might limit gains by raising interest rates before inflation balloons, analysts said. Fed chairman Ben S Bernanke said on October 8 that policy makers would need to raise interest rates “at some point” to control inflation.
Fed moves to cool inflation and the government’s revenue needs will stop gold, according to Jon Nadler, a senior analyst for metals dealer and refiner Kitco.
“These wild calls for several-thousanddollar gold are typical of times when gold goes into uncharted territory,” Nadler said. “The Fed will pull the interest-rate trigger and the Obama administration will, in addition, pull the tax-hike trigger before we get into any serious inflation. Once the man on the street gets in, the gold rally is likely over.” – Bloomberg