Gold Not Faring Well Against Inflation

Barry Ritholtz has a good chart, courtesy of Bianco Research, showing the price of gold in inflation-adjusted terms. As you no doubt know, gold has been on a tear this week, rising to a record high of $1042.80 (U.S.) an ounce on Wednesday afternoon – up 46% since November.

This rise is widely interpreted as a sign that investors are losing faith in the U.S. dollar -- and other currencies, for that matter -- as central banks and governments around the world see the benefits of weaker currencies.

But gold has long been seen as a hedge against inflation. Here, it hasn’t done a good job. While the price of gold might be at a record high in nominal terms, in inflation-adjusted terms, its value today is about half the level it was in 1980. Back then, it traded (again, in inflation-adjusted terms) at $2358 an ounce.

Of course, the price of gold spiked in 1980, which skews the chart. But even if you lop off that peak, you can see that gold has merely meandered over the past six decades.

Comments

[Jasper M:]

HERESY!! The gold bugs will be positively Livid!

Oct 07 03:58 PM

[sofarpretty...:]

It's always nice to hear from people who are mired in the past and can't seem to factor our present day reality into the equation. Good luck to the Neanderthals.

Oct 07 04:35 PM

[Roger Knights:]

Since 1980 gold's price has been under pressure by selling by central banks plus an unexpected increase in supply from the heap-leaching extraction process. Now the supply bump from heap-leaching has been absorbed and central bank selling has gone into reverse.

I think it's a good point that gold isn't invariably a good long-term investment. But it's still a good buy in tight spots, when there's systemic risk--including a threat to the currency. Since 2000 US deficits and low-interest bubble policies and trade deficits and hollowing out of the manufacturing sector have created long-term systemic risk, so gold has been a good investment since that time.

Oct 07 04:36 PM

[sofarpretty...:]

It's always nice to hear from the Neanderthals who can't/won't factor current reality into the equation. It will be interesting to see how that works for you.

Oct 07 04:42 PM

[sofarpretty...:]

Sorry for duplicate posts.

Oct 07 04:46 PM

[E.D. Hart:]

Golds peak is more like $4200 in inflation adjusted terms according to real inflation numbers from shadowstats.com and not the bogus numbers put out by the US government.

But so what if gold is 1/4 of its 1980 peak? That's irrelevant to me going forward. What is Microsoft in its inflation adjusted price?

It doesn't matter--only if its fundamentals look good going forward.

Golds fundamentals look excellent going forward--so its historical under performance is immaterial. In fact isnt that true of every investment or assett class?

Periods of out performance followed by under performance...don't invest using the rear view mirror.

Oct 07 07:11 PM

[frdm45:]

I think you're missing the point, gold is a good hedge against inflation when the masses are actually WORRIED about inflation, which hasn't been a concern since the late seventies, but people are concerned again now. When the masses are not worried about inflation of course you would expect to see gold perform poorly. There is a positive correlation between gold and high expectations of inflation over the last 150 years.

Oct 07 09:27 PM

[The Geoffster:]

The confusion about gold stems from the fact that it is real money. That's all. That's it.

Oct 07 10:01 PM

[tb1975:]

rarely do people have six decades to invest. I agree with the others that are forward looking here- the fact that it is so far below its peak in inflation adjusted terms makes it a more attractive long play here.

When interest rates rise, when the fed stops printing money, when gold is consistently on the cover of major magazines, and when inflation busts over 5%, then it is time to start thinking about selling gold.
this bull has at least 5-10 years left in him.

Oct 07 10:35 PM

[Slvrizgold:]

The DOW was 13000 in 2000 and the dollar has lost 1/3rd vs other currencies so today's DOW price is closer to 6000 in inflation adjusted 2000 dollars.

These morons couldn't possibly be a stupid as they sound. They must be establishment paid propaganda shills. Fortune just wrote a hit piece on gold today telling you why gold is not a good investment and "fundamentals are bad" rofl

The price inflation hasn't even started yet... But it will one day sooner than the media thinks. And gold will be much higher. Gold equities will be the star performers on this next leg up and will trounce any other asset class.

Oct 07 11:53 PM

[Mr. Ed, Jr.:]

And the point of this article is.....what ?

Is there no understanding that when the world is running fairly smoothly (And by smoothly, I mean just your everyday, garden variety chaos and confusion), there may not be much interest in gold as an investment. When times are reasonably below the level of armageddon , the only people who pay attention to gold are the people in the gold industry and governments. The rest of the world does not, in general, give a rat's hind end.

As a result of this massive non-interest, gold often just sort of "sits there".

Mild inflation is the usual state of things, as decreed by the banking interests and influential governments, but it isn't usually enough of concern that people run out and buy gold, so gold can certainly lag behind the inflation rates. The shipping and safeguarding of gold during non-crisis times is more trouble and expense than most people care to involve themselves with.

When people start to lose their jobs, their homes, their wealth, their credit-- and their trust in their own government, they turn to gold.

Gold is a unique investment, truly unlike any other. It's performance cannot be judged by the same standards as other investments.

Oct 08 03:43 AM

[User 497388:]

Seems to me that with real estate still floundering with no end in sight and with money tighter than ever for individuals and businesses to access, added to an unstable economic situation( continued job losses, massive personal and federal debt, lack of savings among americans, baby boomers left in the dust at retirement time and with regular (short term) CD's paying 2% if lucky, the collapse of the american auto industry and basic industrial sector, etc. et. al....That gold seem a very logical choice. Investing in other currencies although and alternative offers no real advantage over investing in gold in my opinion. Also most countries are struggling with the same issues as the US. Also, we are due another wave of bank failures and another melt down in commercial real estate lies close at hand ( been to any malls lately|? or seen the dinosaurs call Mervyn's, Comp USA, Circuit City, etc. sitting unoccupied?? Gold has been a bench mark for thousands of years and despite its fluctuations is no positioned to excel as an investment. People have lost confidence in the stock market, real estate, savings and CD's...When projections show a ( nine trillion dollar national debt along with future liabilities in Medicare and Social Security and other mandated financial obligations pushing over 100 trillion. Gold keeps looking better my the minute...

Oct 08 05:43 AM

[cocomurph:]

Here is a reaseoned, well thought refutation to your POV:

boards.fool.com/Messag...

Cheers!
cocomurph

Oct 08 08:29 AM

[Glen L.:]

The 1980 spike was a massive speculative bubble fueled by the high inflation rates of the 70s. We are almost certainly going to have mass inflation again (the alternative being a protracted depression, much worse than the 30s), and when we do there will be another speculative bubble. Gold is therefore the ultimate protection against high inflation -- as long as the paper money isn't completely worthless. Gold is no protection against hyperinflation, which would destroy the dollar and put the economy into barter mode. Then the necessities of life would be all that anyone would care about owning, and gold would be almost as useless as paper money.

Almost - but not quite. At some point after a dollar collapse, sensible people will demand a return to the gold standard, and everyone still holding gold will be sitting pretty. Silver will be great to have, too.

Oct 08 12:55 PM