Gold at All Time Highs? I Beg to Differ.

The game of investing in gold is a fine line of hedging inflation and increasing worth vs alternative investing and maintaining worth. However, inflation has caused some investors to forget how prices have actually risen. Remember your parents telling you what they could buy for a nickel?

Gold is a traditional hedge against inflation but the price also rises with it. Gold was not a savvy investment for about 20 years, 1980 – 2001 as the dollar was stong. Moreover, it is not a great investment in deflationary periods (see: 2009).

The game of investing in gold is a fine line of hedging inflation and increasing worth vs alternative investing and maintaining worth. If the US were to back all of its dollars 100% by gold (circa pre 1933) or even fractional percentage (1933 – 1974) gold prices would sky rocket, because the gold would have to be repriced (revalued) in accordance to the volume of dollars in circulation.

In January of 1980, gold reached $825.50 an ounce. This is also the time around 13% mortgage rates and 8% – 12% CDs. But, looking at the following chart for average inflation per year from 1980 to today we see that this $825.50 an ounce is worth much more today.

Average inflation per year 1980 – 2010 from Inflation Data.

1980: 13.58% ----- 1990: 5.39% ----- 2000: 3.38% ----- 2010 (Jan – Sept): 1.77%

1981: 10.35% ----- 1991: 4.25% ----- 2001: 2.83%

1982: 6.16% ------- 1992: 3.03% ----- 2002: 1.59%

1983: 3.22% ------- 1993: 2.96% ----- 2003: 2.27%

1984: 4.30% ------- 1994: 2.61% ----- 2004: 2.68%

1985: 3.55% ------- 1995: 2.81% ----- 2005: 3.39%

1986: 1.91% ------- 1996: 2.93% ----- 2006: 3.24%

1987: 3.66% ------- 1997: 2.34% ----- 2007: 2.85%

1988: 4.08% ------- 1998: 1.55% ----- 2008: 3.85%

1989: 4.83% ------- 1999: 2.19% ----- 2009: -0.34%

Figuring in year over year inflation one dollar in January 1980 has the same purchasing power as $3.01 today. One ounce of gold worth $825.50 in 1980 is worth approximately $2487.48 2010 dollars. So, while gold is tipping the scale in the $1400 an ounce range, that is only about the $465 range in 1980 dollars.

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