Gold at $2,000 Becomes Inflation-Adjusted Bullseye for ‘80 High
Oct. 19 (Bloomberg) --
Gold’s rally to a record means
prices are still 53 percent below the 1980 inflation-adjusted
peak.
While gold rose 19 percent this year to $1,072 an ounce on
Oct. 14, consumer
prices almost tripled in the past three
decades, eroding the metal’s value. Bullion hasn’t kept
pace
with the cost of bread, fuel or medical care. In 1980, gold hit
a then-record $873 an
ounce. In today’s dollars, that would be
$2,287, according to the U.S. Labor Department’s
inflation
calculator.
Record government debt and interest rates close to zero
percent
are pushing gold higher for a ninth straight year, and
options show investors expect the rally to
continue. When prices
reached all-time highs, the contract with the most open interest
was the
December call to buy the metal at $1,200. The contract
to purchase at $1,500 an ounce was the third
biggest.
“Gold is not at any peak,” said Martin Murenbeeld, the
chief economist at
Toronto-based DundeeWealth Inc., which
manages $58.5 billion in mutual funds and brokerage
accounts.
“The world’s money supply has increased and gold hasn’t kept
pace,” he said. “We’re
now in a period where gold is catching
up.”
The U.S. Dollar Index, which measures the
currency against
those of six major trading partners, fell on Oct. 15 to the
lowest level in 14
months, and has dropped about 7 percent this
year. President Barack Obama has increased the
nation’s
marketable debt 22 percent to $7.01 trillion to revive growth.
Preserving Value
Gold bulls say today’s record borrowing and low interest
rates mean the government will have to accept faster inflation
as the economy recovers. Investors
buy bullion to preserve value
during times of turmoil and economic stress.
Financial
institutions worldwide have reported credit
losses and writedowns of about $1.62 trillion since the
start of
2007, when the credit crisis began. Group of 20 governments have
pledged about $11.9
trillion to ease credit and revive economic
growth, according to the International Monetary Fund.
“Gold is the hedge against currency devaluation,” John
Brynjolfsson, of hedge fund Armored
Wolf LLC, said in a
Bloomberg Television interview from Aliso Viejo, California, on
Oct. 7. He
predicted bullion will top $2,000.
Banks have raised their gold estimates. On Oct. 9,
JPMorgan
Chase & Co. said the metal will average $1,006 an ounce next
year, compared with an
earlier projection of $950. Deutsche Bank
AG forecast an average of $1,150, up 32 percent from
its
estimate in July. Barclays Capital said Oct. 12 that “prospects
for a run at $1,500 should
not be underestimated” next year.
Understated CPI
Gold would need to rise more than sixfold to top the 1980
record, using a more accurate
inflation-adjustment, said John
Williams, an economist and the editor of Berkeley, California-
based Shadowstats.com. He said the government has understated
the cost of living over the past two
decades with adjustments in
the way it measures the basket of goods and services monitored
by
the U.S. consumer price index, or CPI.
Gold futures for December delivery closed Oct. 16 at
$1,051.50 an ounce on the New York Mercantile Exchange’s Comex
division, gaining for a third
straight week.
“If the methodologies of measuring inflation in 1980 had
been kept intact,
gold would have to hit $7,150 to be the
equivalent of the 1980 record,” Williams said.
The
cost of living in the U.S. rose 0.2 percent last month,
the Labor Department said on Oct. 16.
Compared with a year
earlier, consumer prices fell 1.3 percent. The CPI will drop 0.5
percent
this year, before rising 1.9 percent in 2010, reflected
by the median estimates of 61 economists in
a Bloomberg survey.
Annual increases averaged 2.8 percent a year in the past decade.
Purchasing-Power Adjustment
In March 1980, inflation surged to a 14.8
percent annual
rate, two months after gold capped a four-year rally. Adjusted
for the decline
in the dollar’s purchasing power since then,
gold’s Oct. 14 record of $1,072 represents the
equivalent of
$409 in 1980 dollars, the Labor Department calculator shows.
Since January
1980, the average price of a pound of white
bread has risen almost threefold, from about 50 cents to
$1.38
in August, and medical care has surged more than fivefold, Labor
Department figures show.
Gasoline and electricity prices have
more than doubled.
Today, the gap between gold’s spot
price and its CPI-
adjusted equivalent is the widest ever.
Gold hasn’t been as effective a
hedge against inflation as
oil since the 1980s, said Matt Zeman, of LaSalle Futures Group
LLC
in Chicago.
Oil Beats Gold
Crude passed its 1981
inflation-adjusted record two years
ago. The cost of imported oil averaged $39 a barrel in
February
1981, after Iran cut exports, according to the Energy
Department. That’s $89 in 2007
dollars, the Labor Department
calculator shows. Oil reached a record $147.27 on July 11, 2008,
and closed at $78.53 on Oct. 16 in New York trading.
“If you bought gold in the 1980s, you’re
still losing
money today,” said Zeman, a metals trader. Gold prices in New
York languished for
two decades after declining from the 1980
record, dropping to a 20-year low of $253.20 on July 20,
1999.
While bulls say gold is cheap, the inflation-adjusted price
is 15 percent above its
30-year average, Bloomberg data show.
The Federal Reserve may limit gains by raising
interest
rates before inflation balloons, analysts said. Fed Chairman Ben
S. Bernanke said on
Oct. 8 that policy makers will need to raise
interest rates “at some point” to control inflation.
‘Prepared to Tighten’
“When the economic outlook has
improved sufficiently, we
will be prepared to tighten,” Bernanke said in remarks prepared
for
an Oct. 8 conference in Washington.
Fed moves to cool inflation and the government’s revenue
needs will stop gold, according to Jon Nadler, a senior analyst
for Montreal metals dealer and
refiner Kitco Inc.
“These wild calls for several-thousand-dollar gold are
typical of times
when gold goes into uncharted territory,”
Nadler said. “The Fed will pull the interest-rate trigger
and
the Obama administration will, in addition, pull the tax-hike
trigger before we get into
any serious inflation. Once the man
on the street gets in, the gold rally is likely over.”
Gold held in exchange-traded funds climbed to records this
month at Zuercher Kantonalbank and ETF
Securities Ltd. Holdings
in the SPDR Gold Trust, the biggest exchange-traded fund backed
by
bullion, are up 42 percent this year. Hedge funds and other
large speculators hold their
most-bullish position ever in gold
futures. So-called net-long positions, or bets prices will
rise,
increased by 6 percent to 253,955 contracts in the week ended
Oct. 13, according to the
Commodity Futures Trading Commission.
Gold Producers
The Philadelphia Stock Exchange Gold & Silver Index jumped
43 percent this year, as Phoenix-based
Freeport-McMoRan Copper &
Gold Inc. tripled. Toronto-based Barrick Gold Corp., the world’s
largest producer, fell 10 percent. Barrick said Sept. 8 it will
record $5.6 billion in
third-quarter costs to eliminate fixed-
price contracts as the company bets gold’s value will
climb.
At Jersey, Channel Islands-based GoldMoney.com, which held
$759 million of gold and
silver for investors as of Sept. 30,
founder James Turk said bullion can climb eightfold based on
the
historical relationship between the metal and the Dow Jones
Industrial Average. The Dow is
up 10-fold since January 1980.
Gold and the Dow, which has gained 14 percent this year to
9,995.91, were at about the same level during the Great
Depression and the early 1980s, he said.
On Jan. 21, 1980, as
gold futures surged to $873, the Dow slipped to 946.25.
“The dollar
is constantly being debased and inflated,”
Turk said. “By 2013, gold is going to be at $8,000 and
the Dow
will be at 8,000.”
Gold-Dollar Link
Deutsche Bank said early this month that the dollar will
fall to $1.60 per euro next year, a drop of
7.3 percent from
last week, because of “rising fiscal deficits and loose
monetary policy.”
Gold has moved in the opposite direction of the dollar over
most of the past decade. The
metal’s correlation coefficient to
the U.S. Dollar Index is minus 0.8539, Bloomberg data show. A
correlation of minus 1 indicates two assets move inversely to
each other, while a 1 would show
they move in tandem. A reading
of zero shows no correlation.
Philip Gotthelf, the
president of Equidex Brokerage Group
Inc. in Closter, New Jersey, says he expects gold to trade
at
$1,250 by year-end.
“Gold has been pushing higher because it’s no longer just
a
hedge against commodity inflation, it’s also a hedge against a
change in world-monetary standards.”
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