The "Real" Gold Price
Now that the gold price has climbed above the $850 high reached back in January 1980, many are proclaiming that the gold price is at a new ‘record’. That’s true of course when gold’s exchange rate to the dollar is viewed in terms of nominal dollars, but nominal dollars provide a distorted picture.
After all, everyone knows that because of inflation a dollar today purchases much less than it did twenty-eight years ago, so clearly, $850 today does not have the purchasing power it did back then. The question therefore arises, what price does gold have to reach in inflation adjusted dollars to equal the purchasing power of eight hundred fifty 1980-dollars?
The answer to this question depends upon which Consumer Price Index is used to calculate the inflation adjusted gold price. The two alternatives are the US government’s CPI or the CPI provided by John Williams of www.ShadowStats.com.
These two different CPI measures provide very different inflation adjusted gold prices. So which CPI should we use?
The ShadowStats CPI eliminates the changes made by the US government since the early 1980s to its own CPI measure. In other words, the ShadowsStats CPI is the same one the US government used to calculate inflation while Jimmy Carter was president.
The changes made by the government to its CPI were clearly introduced to lessen reported CPI inflation. A lower inflation rate reduces the cost-of-living increases the US government makes to welfare and Social Security recipients, thereby reducing its budget deficit. Welfare and Social Security recipients suffer the consequences. Their purchasing power is reduced because the payments they receive do not keep up with the real rate of inflation.
An example will be useful to illustrate this loss of purchasing power. Let’s assume that a recipient received $850 per month from the US government in January 1980. Using the US government’s CPI, that recipient is today receiving $2,310. However, if the US government had not made any changes to the way it calculates CPI, the recipient would today be receiving $6,255. This difference can be seen in the following chart, which presents the January $850 gold price adjusted for inflation using both CPI’s.
There are a couple of important conclusions from the above chart. First, gold at its present price of $900 today is still very cheap. In other words, it is a long way from the purchasing power an ounce of gold achieved in January 1980. Second, both measures on the above chart show that the dollar is losing purchasing power every month. So if gold in the future were to reach a $6,255 gold price, the inflation between now and then would require gold to reach an even higher price to equal the purchasing power it had in January 1980.
Rather than reduce inflation, the US government instead shot the messenger. By fiddling with the CPI, the US government wants us to believe that inflation is not as bad as it really is, which is the same strategy it has pursued with the other important inflation messenger – gold. Government interventions to cap the gold price prevent the gold barometer from alerting everyone that inflation is a growing menace.
To conclude, even though gold is trading at a record high in terms of nominal dollars, the real gold price is far below the old January 1980 record when adjusted for inflation. Gold is still good value, and more importantly, government interventions have kept gold cheap, thus enabling us to buy gold at gold prices far less than would be the case if the government wasn’t intervening. Therefore, continue to spend overvalued dollars to accumulate undervalued gold.
Copyright © 2008 by James Turk. All rights reserved.
GoldMoney is a convenient, economical and safe way to buy and sell gold and silver online. GOLDPRICE.ORG highly recommends GoldMoney. To learn more about GoldMoney, click here.
After all, everyone knows that because of inflation a dollar today purchases much less than it did twenty-eight years ago, so clearly, $850 today does not have the purchasing power it did back then. The question therefore arises, what price does gold have to reach in inflation adjusted dollars to equal the purchasing power of eight hundred fifty 1980-dollars?
The answer to this question depends upon which Consumer Price Index is used to calculate the inflation adjusted gold price. The two alternatives are the US government’s CPI or the CPI provided by John Williams of www.ShadowStats.com.
These two different CPI measures provide very different inflation adjusted gold prices. So which CPI should we use?
The ShadowStats CPI eliminates the changes made by the US government since the early 1980s to its own CPI measure. In other words, the ShadowsStats CPI is the same one the US government used to calculate inflation while Jimmy Carter was president.
The changes made by the government to its CPI were clearly introduced to lessen reported CPI inflation. A lower inflation rate reduces the cost-of-living increases the US government makes to welfare and Social Security recipients, thereby reducing its budget deficit. Welfare and Social Security recipients suffer the consequences. Their purchasing power is reduced because the payments they receive do not keep up with the real rate of inflation.
An example will be useful to illustrate this loss of purchasing power. Let’s assume that a recipient received $850 per month from the US government in January 1980. Using the US government’s CPI, that recipient is today receiving $2,310. However, if the US government had not made any changes to the way it calculates CPI, the recipient would today be receiving $6,255. This difference can be seen in the following chart, which presents the January $850 gold price adjusted for inflation using both CPI’s.
There are a couple of important conclusions from the above chart. First, gold at its present price of $900 today is still very cheap. In other words, it is a long way from the purchasing power an ounce of gold achieved in January 1980. Second, both measures on the above chart show that the dollar is losing purchasing power every month. So if gold in the future were to reach a $6,255 gold price, the inflation between now and then would require gold to reach an even higher price to equal the purchasing power it had in January 1980.
Rather than reduce inflation, the US government instead shot the messenger. By fiddling with the CPI, the US government wants us to believe that inflation is not as bad as it really is, which is the same strategy it has pursued with the other important inflation messenger – gold. Government interventions to cap the gold price prevent the gold barometer from alerting everyone that inflation is a growing menace.
To conclude, even though gold is trading at a record high in terms of nominal dollars, the real gold price is far below the old January 1980 record when adjusted for inflation. Gold is still good value, and more importantly, government interventions have kept gold cheap, thus enabling us to buy gold at gold prices far less than would be the case if the government wasn’t intervening. Therefore, continue to spend overvalued dollars to accumulate undervalued gold.
Copyright © 2008 by James Turk. All rights reserved.
______________________________
GoldMoney is a convenient, economical and safe way to buy and sell gold and silver online. GOLDPRICE.ORG highly recommends GoldMoney. To learn more about GoldMoney, click here.
posted by goldprice at 7:25 PM
11 Comments:
So true! I'm glad someone pointed out the price using unmanipulated measures found at the Shadow Stats site. Gold is trading at at least 1/5 of what it really should be and that margin grows wider as the Fed keeps inflating the dollar.
So, you think that gold "really should be" trading routinely these days at a level equivalent to its 1980 blow-off maximum? You know what? Even in 1980, it didn't "really should be" trading there. But that's what it took to pop what everybody agrees was a bona fide unsustainable bubble. Nobody thinks that gold should have stayed at $850 back then. I don't argue against this methodology of inflation-adjusting prices in order to do historical comparisons, but, you're comparing today's routine business-as-usual to January 21, 1980, which is a special case, not a reasonable comparison to whatever an idealized healthy sustainable un-manipulated inflation-adjusted price would be today.
What's all the fuss about the current price of Gold and why is it always singled out to be compared with 1980 levels?
Everybody seems quite happy that houses in 1980 were, say, £25000.00, and now they are ten times more at £250,000.00. Or, what about the DJ Index, in 1980 it was 850 and now it is 12000, thats more than ten times higher again. The price increases are even more impressive with food and other commodities.
Just about everything is ten times, or so, higher now than in 1980. So translating that to Gold, it could be argued that a reasonable price for Gold is now 4000-5000 US Dollars even without the 1980 blow-off peak. ie, if Gold had crept up to 400 dollars in 1980.
The most commonly traded price around 1980 was maybe $425, half of $850 used in the article. Taking that $425 as a reference, and using the "real" inflation figures, gold should now be above $3000, not $6000.
On the other hand, in 1976, gold's low was just above $100, which means the current price of $900 is also historically justifiable, albeit a bit on low end.
The fact that gold isn't at $3000, is not necessarily a great buing opportunity, but a sign of weakness. There must be a reason for gold to stay weak, while other "real" assets grow in value.
If the gold price will not "normalize" within a few years (during which governments busy themselves printing more fiat money) it looks all the more probable the time of gold as an inflation hedge is over.
If the central banks really have been on the selling side, keeping a lid on gold, that would be excellent news. In currency markets, one can't go wrong by going against a central bank. I'm pretty sure the same applies to gold as well. Maybe someone can point out a link to statistics about central banks' gold holdings over the last decades?
One thing to note is increasing supply of gold in the open market across the world over the last few years. There was no demand proportionate to the supply for the last few years, until China and India started to buy heavily during the economic boom and the dollar started its journey down south. If the global demand drops and dollar gains back its value, gold is certain to go back to lower levels.
Enjoy the ride as far it lasts :)
I really appreciate your article and the way it informs the average person out there. Many people keep saying that if you buy gold now, you've missed the boat. However, with your advice and Addison Wiggin's advice (I believe he wrote the foreword for your book), one will realize that in fact, gold is still a great value.
Pursuant to that, the US economy and dollar only recently started its decline; and when the US economy and dollar decline, gold goes up. Any economic historian knows that downturns don't reverse overnight, and it's therefore logical to assume that the gold price will keep rising in the face of continued downturns.
I wonder, however, how much of the increase in gold price is merely a weakening of the US Dollar?
someone please factor in the new gold production to todays value. there is a bit more gold extracted since '80 - help us out here.
I think a better starting point for comparison would be the purchasing power of gold prior to 1913, before the the government granted the counterfeiting monopoly to the Federal Reserve Bank, which by the way, isn't Federal, has no real reserves and is not a bank.
You people in US are lucky to have inflation what it is over there. Where I come from, annual inflation is more than 30% at present, and prices of goods are more than 100 times what it was in 1980, the year I was born.
If only we could get the government to do the samething with oil. We do not need gold to get somewhere, gold is a nice to have. We do need oil to get somewhere no matter if we car pool, ride the bus, or drive our own cars somebody pays at the pump. Guess Who! You and Me <--
Quality comments posted here !
I happen to have unshakeable faith in 4 things:
1) The fundamental insecurity of human beings
2) That greed and envy are an inextricable aspect of human nature and that is not going to change any time soon, New Age or beyond (though meditatation is healthy :-)
3) Human beings are for the most part not rational, nor can be expected to behave rationally.
4) Inspired creativity and leadership do exist but they are as rare as the dodo bird and Winston Churchill (and about as alive and well).
What do you guys think the average Joe will do when he wakes up one day to discover that his dollars are not just worth less, they are essentially unbacked, unredeemable, and worthless(assuming he has any of the counterfeit currency left)?
Prognosis: gold will be VOLATILE for quite a while reflecting the true instability of the global monetary system which was to a great extent corrupted by the U.S.(Nixon) in the early 70's when America essentially defaulted on its future debt. The macro trend: Up. WAY up (though nobody wants to get caught in a temporary downslide). Gold is not the bubble, the U.S. and increasingly other Western corporate economies are the bubble.
Look East friends. Iran and China are dying to convert their worthless green paper into real property.
Disclosure: my position in gold - growing quietly...
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