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Gold prices, 1980-2001

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FlyingAxe posted on Sun, Feb 19 2012 5:59 PM

I was looking around at Measuring Worth and decided to take a look at the gold prices as compared to CPI. This is the graph I saw:

 

It looks like the prices on gold were falling between 1980 and 2001 (while CPI kept going up). If you invested in gold in 1980, you'd get your money back (not accounting for inflation) in 2006. So, it looks like investing in gold in the last two decades of the 20th century was not a good idea? Am I missing something? Is there an explanation for this?

A zoom-in on the 1980-2010 period:

 

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1) CPI to gold is not a 1-1 ratio. There are extremely many confounding factors

2) Gold is not an investment, but a store of value.

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1. I understand, but if you would expect that in the long run, price of gold would correlate with CPI, especially if you're using gold as a "store of value".

2. Right, I misspoke. But if you considered using gold in 1980 as a store of value, you wouldn't be able to recover the value that you stored in gold for the next 26 years (probably more, taking inflation into account).

 

If I wanted to play Devil's Advocate, I could say that the graphs support the "gold bubble" hypothesis: the gold prices go up in the times of financial volatility and fall in the times of relative stability. Why is this argument wrong, in terms of the data?

Also, what does the graph for interest rates look like for 1980-2001?

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Just because gold wasn't a good investment from 1980 - 2001 doesn't mean that it isn't a good investment now. 

Gold is a good investment in times of financial panic. The question you need to ask yourself is, do you think the central planners have contained the situation? 

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From googling about gold prices and the 80s, from this article:

 

July 1979: Paul Volcker was appointed as Fed Chairman while  gold continued to surge, hitting $400 in October. While this was happening, Mr Volcker was attending a conference in Belgrade. There the assessment was made that the global financial system was on the verge of collapse. When Mr Volcker returned to the U.S. from Belgrade, he took a momentous step. He announced that the Fed was swiching its policy from controlling interest rates to controlling the money supply.

Gold 1968-1999

I worked at a jewelry store in 1980 and learned how to spot-price our gold merchandise because it was a waste of time to affix labels to the inventory.  U.S. interest rates skyrocketed. As they rose, the dollar first slowed it’s descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted, but at a cost. The U.S. Prime rate hit 20% in April 1980 and stayed there (with a brief dive in mid-1980) until the end of 1981. There was a rush out of Gold and back to Dollars.

Once interest rates began to come down, in early/mid 1982, the choice of where to put the Dollars faced investors once more. The initial solution was just as it had been in the 1970s. The Dow took off – rising from 776 to almost 1100 between mid August 1982 and late January 1983. Gold fell $105 in the last four trading days of February 1983. As it fell, the Dow broke above the 1100 point level for the first time. The long bull market in stocks, and the long stagnation of Gold, had begun.

 

So, my question is: who is to say that Fed won't do the same thing again?

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My question is not about gold as a target of investment, but as a medium of savings.

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I believe gold to be a good savings vehicle in this environment. It's highly liquid, stable, and as always is a good store of value.

Bernanke is no Volker, ZIRP is here to stay for the forseeable future( we already know until 2014 at least).

Gold should stay ahead of inflation, it may not be the best performing asset, but if your concerned about its value as a savings vehicle then you should feel secure. Worst case scenario is gold starts to decline and you unload for cash.

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cporter replied on Mon, Feb 20 2012 11:14 AM

FlyingAxe:
My question is not about gold as a target of investment, but as a medium of savings.

Gold is no different than any other medium of savings that isn't being invested. If you purchase it at its most valuable and demand lowers (whatever the reason) then you will lose money. In the 90s people bought Tickle Me Elmo dolls at the height of its demand for $1,200. Now you can get them for 30 bucks on eBay. Likewise, if you purchase dollars at their most valuable then future inflation will erode that purchasing power.

The advantage of dollars is their ability to be invested, as opposed to gold which is simply invested in. Gold is probably a better store of value than cash in the mattress, but probably worse than cash in an S&P 500 index because that cash is doing work for a very long time.

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Clayton replied on Mon, Feb 20 2012 12:36 PM

You're looking at the graph completely wrong. Look at gold versus CPI from, say, 1910 to 1981. What do you see? Look carefully. You will see that CPI was steadily pulling away from the fixed price of gold. The international banking price of gold in dollars broke down in 1944, which is why we had Bretton-Woods but this was a temporary fix that lasted only until 1971 (really, it had broken down by 1968). Gold spiked in 1981 as a result of a variety of unique causes. If you erase that spike, what you get is a pretty steady trend: gold prices and CPI constantly rising in roughly the same ratio with the exception of a plateau from the late 80's to the early 00's, a plateau whose explanation is, I believe, conspiracy-theoretic.

Gold is the single most politicized commodity; even more than oil, as difficult as that might be to believe. The official price of gold is not its market price Compare the delta between GLD and street prices for physical delivery over the last 4 years, for example. Differences in excess of 10% are common.

Clayton -

http://voluntaryistreader.wordpress.com
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