The Secret Price of Gold
Kevin DeMeritt
President, Lear Financial
You've heard the saying, "They don't make 'em like they used to"?
Well, they don't charge the way they used to, either. Nobody does. Try buying a loaf of bread for 50¢. Or a gallon of gas for $1.25. Nothing costs the same as it did in 1980. Nothing.
Except, maybe, gold.
That little anomaly has caused many an analyst to scrunch his brow and scratch his head. Not only is gold long overdue for a price explosion, the factors that usually cause its detonation are everywhere you look. And, really, that's pulling punches. What I mean to say here is that they're everywhere you look in their most extreme forms.
Still the price of gold is stuck in the days of disco and Jimmy Carter. And that's on a very good day.
Gold Is Getting Even Rarer
Has something happened to change gold's dynamics the past 26 years? Has there been some gigantic gold find? Some Valdez pipeline of precious metal that's made gold as common as, well, oil? Uh uh. Quite the contrary, actually.
Production has not only stalled, it's been rolling backwards. The South African gold industry, for one precious metal producer, looks like it's running out of gas. In 1970, 70 percent of the world's gold came from that country. But, by the 21st Century, that had shrunk to a mere 14.5 percent of global output.
South Africa isn't alone. "After peaking in 2001, world gold production has been steadily slipping. One reason for the lack in new supply is there haven't been any big discoveries of gold deposits lately, certainly not on the scale seen in the 1980s and 1990s. For those few discoveries that have been made, the length of time needed to develop and extract these deposits has lengthened from four to seven years," wrote Bernard Baumohl, Time Magazine's senior economics reporter.
Don't count on higher gold prices reducing that four to seven year lead time. Pierre Lassonde, president of Newmont Mining, the world's largest gold mining company, gave this rather famous quote: "If gold was $1,000 an ounce, it still takes four to seven years to open a mine."
That said, gold remains stuck in its weird 1979-1980 time warp like Michael J. Fox in Back to the Future.
Gold At An "Inflation-Adjusted" $2,176
"In terms of today's dollars, gold reached $2,176 in 1980."
That eye-opening news comes from Larry Edelson of Weiss Research, and what he means here is that gold isn't just undervalued at today's price, it's a steal.
Edelson continues: "Even if it were to reach just half of its inflation-adjusted price, the yellow metal would zoom to more than $1,000 an ounce, a gain greater than 50% from today's level."
Which, by any investor's standard, would still be a steal. Edelson's premise is that gold would "have to more than triple just to regain the same purchasing power it had 26 years ago!"
The funny thing about gold is, it's been one of mankind's best barometers of purchasing power. At least until 1980. But whatever has kept it back since then, whatever mischief central banks have been up to in manipulating the precious metal, it will all soon give way to the irresistible pressure that's been building.
Like Mount St. Helens back in 1980, gold may finally be ready to blow.
An Avalanche of Inflation on the Way
Back in 1980, the price of an average new car was $7,609, while, according to Car and Driver magazine, the average cost of a light vehicle today is $27,800. That's a 265 percent increase - over ten percent of "real" inflation a year for the past twenty-six years, a statistic reflected by the prices of most consumer products.
And as bad as it's been, it looks even scarier today.
"Since 2001, gasoline is up 49% … beef is up 28% … eggs, oranges and tomatoes are each up more than 30%. The price of oil is up more than 500% since 2001!" wrote Edelson. But you don't have to be an analyst to know that real inflation bears absolutely no resemblance to the government's official rate of 3.5 percent.
All you have to be is an adult who spends money.
Why Gold Will Finally Snap
I like what analyst Christopher Laird had to say about how gold moves. He said "gold has an elastic effect in recapturing its value … it wallows in low levels until a snap effect occurs."
That snap is currently about a quarter century overdue. And if you think today's $600-ish gold price is as high as it's going to get for a while, you've already forgotten the middle part of this article. That's the part that says gold needs to triple just to regain its 1980 purchasing power.
Now that would be some kind of snap.
The thing is, there's even a basis for predicting this upcoming gold snap, and it goes like this:
Four separate times, between 1974 and 1980, you could have predicted rising gold prices just by looking at what oil was doing. There was a sequence to it - first oil would rise, then inflation, then interest rates, then gold. It was a very predictable freight train, and, as I said, it happened four separate times over six years, culminating in gold reaching $850.
Today, with gas now over $3.00 a gallon, that very same freight train has left the station. And just as in the 1974/1980 cycle, higher inflation will soon follow today's oil prices, then higher interest rates, then higher gold.
Then, finally, there will be enough momentum for gold to actually hit its honest-to-gosh, real-time, not-adjusted-for-inflation price.
You'll probably want to be a gold owner long before then.
Kevin DeMeritt
www.goldcentral.com
August 17, 2006
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