Gold Myth No. 1: Gold is (too) expensive

The following note is abstracted from a Special Report on Gold published by Austria's Erste Bank and written by gold expert Ronald Stoeferle. Other abstracts and analysis from this report will also be published in due course

VIENNA (ERSTE BANK) - 

One might as well say that it is not the price of gold that rises, but the value of the respective paper currency that falls. Gold preserves the purchase power and in fact even increases it gradually. Comparing how many real assets one ounce of gold would buy in a historical context, can substantiate this statement.

In 1980 the American currency had a significantly higher purchase power than today. According to the official inflation calculator of the Federal Reserve, the inflation-adjusted all-time-high of one ounce of gold is currently USD 2,300. In other words, the gold price would have to rise to USD 2,300/ounce in order to reflect the real equivalent value of 1980. Oil, the black gold, has recently passed its real highs of the 1980s for the first time - we expect a similar scenario for gold sooner or later.

The inflation-adjusted gold chart puts the most recent price increases into perspective.

Whilethe gold price was at USD 850/ounce at the end of the 1970s/beginning of the 1980s, the average American household income amounted to about USD 17,000 per year. Nowadays an annual income of USD 17,000 would put a family of four below the poverty line. The level of debt has increased dramatically as well over the past decades. Whereas private households were USD 10bn in debt in 1987, this amount has meanwhile increased to USD 28bn, i.e. 350% of GDP. This means that a nominal comparison of the gold price over decades is of limited significance. Therefore the following graph shows the gold price on an inflation-adjusted basis:

In a long-term perspective the gold price is therefore not overheated at all - in fact, quite the opposite is the case: the chart above highlights the fact that the price has seen a trend reversal.

On an inflation adjusted-basis, the gold price is still almost 260% away from its highs at the beginning of the 1980s. In order to reach its all-time-high in real terms, the yellow metal would have to rise to USD 2,300 - only then could one claim that gold is actually expensive.

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Related Links DOCUMENTS:  2009-07-02 Special Report GOLD-2

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