Thursday, April 7, 2011
This chart of inflation-adjusted gold prices omits (because it plots only month-end data) the speculative frenzy that briefly drove gold prices to almost $900/oz in January, 1980, which in today's dollars would be about $2500/oz. If you want to see a chart with that included, Mark Perry has it. If you think gold might revisit its former highs in real terms, then be my guest and buy gold today, and you might make a quick 70% on your investment if you're nimble and can get out before it collapses, because I seriously doubt that gold can sustain prices of $1500-2000 for very long. Gold is as high as it is today because there is a lot of bad news supporting its price, and it's priced for even more bad news: the explosion of the Fed's balance sheet, which potentially could lead to a gigantic rise in U.S. inflation; the record weakness of the dollar, which threatens to collapse; the multi-trillion dollar federal deficits that could stretch as far as the eye can see; and the turmoil in the Middle East that could threaten a major portion of the world's oil supply, for starters.
Any or all of these developments could create havoc and even chaos all over the world. I'm not saying that it won't happen, but I do believe that "the end of the world as we know it" is a low-probability event. Those who buy gold at today's levels must believe it's a relatively high-probability event, because they are paying a price that historically, in real terms, is very high. In today's dollars, the average price of gold over the past century has been about $450/oz.
Posted by Scott Grannis at 11:14 AM