Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Inflation and Speculating in Gold

Commodities / Gold and Silver 2010 Sep 04, 2010 - 05:32 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleSince gold stopped being money, it's become 75% more valuable on average...

SO GOLD is now at "fair value" says Bill Bonner, long-time gold bug and my former boss/partner-in-crime at The Daily Reckoning's London HQ.


No, he won't sell yet...if ever...says Bill. But gold's huge under-pricing a decade ago has clearly passed by. Value-hungry investors got their "reversion to the mean", and in the form of 400% gains, too. What one ounce of gold bought 2,000 years ago – a good suit of clothes, in Bill's oft-repeated example – it now matches, if not exceeds in price, here in late 2010.

From here, that makes it a "speculation".

Never mind that, around the birth of Christ, all clothes were hand-cut and sewn locally...rather than glued together by the world's cheapest labor, four or eight thousand miles away. A suitable outfit for visiting the coliseum or agora would have been made-to-measure, too...and today's finest tailors, at least in London or New York, will ask much more than the $1240 you'd raise by selling one ounce at current "spot gold" prices.

Never mind all that. Because Bill's point is well made, again...

Gold was a screaming buy at the start of last decade, sinking to its lowest price – in real terms – since the early '70s, as the chart above shows (courtesy of the World Gold Council, and taken from Roy Jastram's incomparable study, The Golden Constant).

But "Nobody cared! Nobody was interested," as a (very drunken) London dealer cried at me late last year. "I'd email out jokes, porn-site links, anything to get clients reading so I could repeat three simple words: 'Buy gold now!'

"But they didn't care...I don't even know if they looked at the porn..."

Today, in contrast, you can't move for anxious investors and bullish hedge funds piling into gold. Or so the media coverage would make it seem. New gold dealers – online and on Wall Street – are meantime sprouting like fungus to catch the "retail dollar", and the story's grown so old, it's even spawned its own calendar for financial hacks (the summer lull, India's post-harvest festivals, quarterly data from the mining-backed World Gold Council, the Sept-end of each year of the Central Bank Gold Agreement). Wherever you look, the only debate that counts – "It must be a bubble, so when will it burst?" – rolls on for what is now more than two years.

As for the dumb lump of metal, yes – it continues to pull in new money, nudging its purchasing power ever-closer to the big top of 1980. But look again at that chart above. For while Roy Jastram saw a "golden constant" in his two centuries of US data (and four centuries of British gold prices), the shorter-term volatility is striking. Not least since gold ceased being money 39 years ago, and became mere trinkets and collectibles instead.

"In terms of what gold will buy, it does not seem undervalued to us," Bill Bonner writes. "As near as we can tell, gold is now fairly priced.

"[So] the reward now is different. It is speculative...not inherent. We cannot expect to make money by waiting for the metal to revert to the mean. It's already at the mean."

But what is gold's mean purchasing power – the "golden constant" of Jastram's peerless research? By our reckoning here at BullionVault today, it has risen sharply since the US abandoned its last pretence of a gold standard and floated the Dollar in August 1971. Compared with the first seven decades of the 20th century, in fact, gold's real purchasing power has stood more than 75% higher on average. Which seems odd. Because without being used as money – its only utility beyond decoration – gold became only more valuable. So while its purchasing power may have looked "constant" across long historical periods from Roy Jastram's vantage of 1977 (and again to die-hard gold bugs 20 years later), its utility had in fact changed.

Gold became more useful as a way of storing purchasing power, even though it was no longer money. Or rather, because it was no longer money, in an age where "Every morning, when you look in the mirror, I want you to think 'What am I going to do today to increase the money supply?'..." as John Ehrlichman, assistant to Richard Nixon, apparently told Fed governor Charles Pardee, sometime in the early 1970s. Post-war economic policy across the West was haunted by the Great Depression, and thus flowed from the fear that, unless money was losing value, then spending and particularly investment growth would grind to a halt.

Without the spur of inflation, capital would choose to sit tight – in purses, pockets and deposit accounts – because its purchasing power today would be retained tomorrow. Savers could thus spend (or not) as they chose, rather than being forced to exchange or grow their money to realize or maintain its present value. Devaluing their money, in contrast, via persistent (and obvious) inflation would force savers into the stores and stock-broker's office. And thus today's targets for persistent (and obvious) inflation were born.

"[Harvard professor] Kenneth Rogoff is proposing that the United States use a burst of inflation to get out of its slump," writes Princeton professor Paul Krugman. "I agree...[but] if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period...[not Rogoff's] two or three years of slightly elevated inflation."

Bill Bonner's bang on the money, in short. Gold from here is a speculation, but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme – massive new money inflation.

What price gold's utility as a store of real value if...when...they succeed?

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules