Gold Well Below Inflation Adjusted 1980 High in Deutsche Mark

Gold

Gold has remained firm despite an increase in risk appetite as seen in the bounce in equity markets in Asia and Europe so far this morning. While Korean concerns have abated for now, eurozone "peripheral" debt is under pressure again pushing spreads with bunds to, or in some cases close to, euro-era highs. The 10-year benchmark bond of Ireland is now up 6 basis points at 8.72%, while Portugal and Spain are up 7bp to 6.87% and up 11bp to 5.14%, respectively. This has seen gold remain firm in major currencies and remain near nominal highs in euros.

Gold is currently trading at $1,372.63/oz, €1,028.80/oz and £870.79/oz.

Gold in Euros (Deutsche Mark converted) in Nominal Terms and Not Adjusted for Inflation

The Thanksgiving holiday in the US is seeing light trading in commodity markets but oil has crept over $84 a barrel after its 3% rise yesterday. The selloff in German bunds and US Treasurys and 10 year bonds yesterday might be an early warning that investors are concerned that contagion in eurozone periphery debt could gradually lead to higher rates in less risky bonds.

Should the euro fall below the technical level of 1.33 to the dollar then it could quickly fall to 1.30 and this would see gold priced in euros rise to new record nominal highs over €1,050/oz.

When adjusted for inflation, the record high price of gold in 1980 in Deutsche mark (converted to euros) was over €1,800/oz (see chart above). Thus, gold remains nearly half of its price in 1980 when adjusted for inflation in many currencies which should give those calling gold a bubble pause for thought.

Rather than gold rising in price, what is actually happening is that the world’s major currencies are being devalued through unprecedentedly loose monetary and fiscal policies which is seeing paper currencies fall in value versus the finite currency that is gold.

This process looks set to continue for the foreseeable future. Until politicians in the US and other major industrial nations are able to withdraw stimulus spending and restrain public spending, as Ireland has been doing to its cost, gold will likely remain in a bull market. Until central bankers raise interest rates to more normal levels at least above 5%, paper currencies will continue to depreciate.

Unlike property, equities and most asset classes (even oil) which have risen to multiples of their previous record nominal highs , gold remains nearly half the price it was in 1980 in dollars and other major currencies ($2,300/oz) when adjusted for inflation.

In January 1980, gold became a bubble after rising by nearly 100% in 1979 alone and a massive 2,400% in dollar terms and by more than 700% in Deutsche mark terms – one of the strongest paper currencies in the world during the 1970s.

We are beginning to realize the euro is a far more risky currency and may not even survive the current crisis and therefore gold’s performance in Deutsche mark terms in the 1970s is likely to be repeated and surpassed. A 700% increase would see gold in euro terms rise from €250/oz in 2000 to some €2,000/oz in the coming years.

Given the scale of the current crisis and the fact that the UK and US fiscal positions are worse than they were in the 1970s, gold’s bull market looks on a sound footing.

As ever, the future movement of all asset classes is unknown and real diversification remains of fundamental importance.

Silver

Silver is currently trading $27.45/oz, €20.57/oz and £17.41/oz respectively.

Platinum Group Metals

Platinum is currently trading at $1,654.50/oz, palladium at $695.00/oz and rhodium at $2,300/oz.      

     

 

Mark OByrne

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