Why Gold Is NOT At An All-Time High
Gold is making headlines. Gold is at an unprecedented $1,300 per ounce. It was hailed as a point of vindication for gold connoisseurs, and as a subtle snub of skeptics who called gold a bubble at $700.
This dialogue isn’t unique, however, and may not even be unprecedented. In an insightful editorial, Harvard’s Kenneth Rogoff argues that gold prices are actually, adjusted for inflation, still lower than in 1980:
“After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980. Back then, gold hit $850, or well over $2,000 in today’s dollars. But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability. At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. So what could justify another huge increase in gold prices from here? One answer, of course, is a complete collapse of the US dollar.”
Speculating that gold prices will rise is, at least partially, a bet against market stability. While economic predictions vary from world chaos to a stagnating recovery, the variance ranges from bad to worse. Economists who think optimistically are about as rare as politicians who think economically.
We explained here at Stand Strong Research just last week that some economists have been arguing that we should destroy the dollar to decrease federal debt — and yesterday the Wall Street Journal confirmed this by saying this discussion was taking place in The Fed itself.
Pronounced inflation would lend even more credibility to the search for assets that are not dollar-based. As the world threatens to move away from a dollar standard and Congress tries to convince China to adapt its own monetary policy, this trend continues to gain strength.
In addition to inflation, the other concern Dr. Rogoff raises is unsustainable deficit spending. Other nations are facing severe repercussions to national debt this week; Fitch downgraded Ireland’s credit rating while Greece found itself in even more hot water. America’s trillion dollar deficit and $13.5 trillion debt pale in comparison to the real behemoth: unfunded liabilities. The federal government debt, including long-term entitlement program obligations that have yet to be resolved, is approximately $110,723,500,000,000.00. That’s over $100 trillion.
This potential for crushing inflation, falling dollar, lack of confidence, and political instability mean that people flock to gold, whether or not it’s a logical move. The price of gold over the next few years could have an inverse correlation to our economic health.
There are other factors in play, of course. Developing markets that have outperformed traditional investment vehicles are becoming more attractive to investors who want to branch out of Wall Street. Nonetheless, those who bet on gold are often still the ones betting against recovery.
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