Gold is surging above $1,400 per ounce so it seems like a good time to evaluate Gold’s run along with its relative value versus other precious metals. The first item to note is that Gold did not become an exciting investment until Nixon put the kibosh on the Dollar’s peg to Gold on August 15th, 1971. What this means is that inflation adjusted gold prices did not vary much in dollar terms until about 1970. We can see that directly in an inflation adjusted price chart. It is interesting to note that even though gold increased in value by well over 600% between 1969 and 1980, it was a terrible investment after that period until about 2001.
Two historic spikes in gold prices
The most impressive run-up peaked at the beginning of 1980. As you would expect, inflation was at or near its peak when gold was spiking. The same approximate time period would mark the peak in longer term treasury rates as well, though they lagged by about 6-9 months.
Gold spikes when inflation spikes? Not really.
The above inflation chart is interesting in combination with the spike in gold because we are currently seeing gold rally ferociously without any sign of inflation. Our entire premise for a rally in gold is based upon our expectation of currency devaluation or general lack of faith in our government and its ability to pay its debts in real dollars. I will not argue that point or the extent to which the dollar may devalue over time, but I will be cautious of just how violently gold can bust as it did after its 1980 peak.
