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Determining the True Inflation-Adjusted Gold Price
As the authors suggests(?), it may be more realistic/valuable to price gold not only in Dollar but additionally against inflation as the Dollar has lost purchasing power over the past. Being a millionaire in the 1920s or 1980s was more worth than being a millionaire today (under the assumption of equal “opportunity costs”), because the purchasing power of the Dollar has not become more. The quantity of all above-ground gold has also not become much more.
Samuel Williamson, University of Illinois at Chicago: “Economists commonly use the real price measure when they are trying to account for the impact of inflation.The real price today is computed by multiplying the value in the past by the increase in the consumer price index (
). The result compares that past value to a ratio of the cost of a fixed bundle of goods and services the average consumer buys in each of the two years. In the construction of the CPI bundle, an effort is made to compensate for quality changes in the mix of the bundle over time. Still, the longer the time span, the less consistent the comparison... Using the real price is not the correct index to use for measuring the value of [gold]… in today's prices. It does, however, give an idea of what the cost of purchasing [gold]… was in [today's]… dollars.” (
If you held an investment, such as government bonds, with a fixed (“nominal”) interest rate of 3% p.A. and inflation ran at 4% during that year, the real interest rate of this investment was minus 1% – net you really lose. It is common practice and works so fine, because the time span is not long and inflation is simply just subtracted from the yield – as just finding out “the difference”. It’s a different perspective why we adjust the gold price by inflation as this shows us the price of gold (we would have to pay on any selected day in the past) measured in today`s Dollars. Back then, at the high of the 1970s bullmarket, how many Dollars would I had to put on the counter (for real) to buy 1 ounce of gold considering wanting to pay at the same level of purchasing power the Dollar has today? Roughly, 2,640.
In October 1979, the USA held some 0.26 billion ounces gold and had around 105 billion Dollar circulating. 105 billion Dollar divided by 0.26 billion ounces equals 404 Dollar/ounce – 1 Dollar bought you 0.08 gram gold (1 ounce = 31.1 gram). In October 1979, gold traded at around 400 Dollar/ounce, so it was “fairly valued”? In April 2011, the USA held some 0.26 billion ounces gold and had around 943 billion Dollar circulating. 943 billion Dollar divided by 0.26 billion ounces equals 3,627 Dollar/ounce – 1 Dollar would buy you 0.008 gram gold. In April 2011, gold traded at around 1,500 Dollar/ounce, so the gold price has to rise by a factor of 2.4 to be “fairly valued”? At 1,500 Dollar/ounce, 1 Dollar buys you 0.02 gram gold – that’s 2.5 times more than 0.008 grams at $3,627. In 1979, when gold was “fairly valued”, you got 10 times more gold for your Dollar than gold “fairly valued” at $3,627. If today 10 times more Dollar are circulating than in 1979, then the price of 1 gold ounce must rise 10-fold from the 1979 price as well? What if $400 in 1979 was not “fairly valued”, but darn cheap respectively “undervalued”? In January 1980, gold topped at $852 – 1 Dollar bought you 0.04 gram gold. If you keep on having 0.26 billion ounces gold and your Dollar quantity (or value?) increases, each Dollar now buys you less (or more?) gold? If 10 times more Dollars have been produced and the value of 1 Dollar roughly stayed the same, then what?
"What is a cynic? A man who knows the price of everything and the value of nothing." (Oscar Wilde)
Apr 19 12:25 PM
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