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Monday, October 19, 2009

Gold at $2,000 Becomes Inflation-Adjusted Bullseye for ‘80 High

Gold at $2,000 Becomes Inflation-Adjusted Bullseye for ‘80 High
By Pham-Duy Nguyen

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.


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“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.

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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.


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.


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.”


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