I would now like to address something that I don't think is well understood now.

That is that gold is really now at a price of $230 in 1983 USD.

In 1983, Gold corrected from the 800's in those dollars down to about $500. This was after Volker increased US interest rates to the high teens to combat out of control US inflation.

Now, I have done a study for my readers where I calculated that gold is now $230 in 1983 US dollars. In other words, gold is about half the price it was in real terms as in 1983 when it stabilized to about $500 then, after Volker had raised US interest rates to the high teens to combat US inflation which was running rampant then.

The present press is talking about gold reaching its all time highs of near the 870s back in the early 1980s.

The fact is that gold reaching 870 now is really a very low real level. If we were to reach 870 gold now we are definitively NOT reaching an all time high, rather we are merely reaching some kind of par with the gold environment of the late 1970's.

In other words, gold is not anywhere near reaching its all time high of 870 in 1983 dollars.

I will outline this argument here and when I am done I suspect that you will have no further problems buying physical gold bullion at these present prices in the $700 range. This analysis is definitely NOT intended to be used for speculating.

As a matter of fact, I expect to be buying gold for $1000 an ounce personally, and I have not one slight problem doing that if that comes to pass.

Now before I lay this out, I wish to point out that gold could correct to … say 600$ in the next month, but I doubt that it will. BUT even if I bought it now at $700 and it went down to $600 next week I could not care less. This discussion will show you why.

I have been looking at the issue of inflation adjusted gold and silver prices for my subscribers. They already have all this data I am about to show you. The data is not terribly brilliant, but I have to say, the data I present is so much easier to understand than the usual inflation adjusted gold and silver price charts going back in time.

The conclusion of my analysis is that gold and silver are very cheap right now even at $700 for gold. Silver is not quite as good a buy as gold now according to this analysis, but it is a good buy nonetheless.

The inflation corrected Gold analysis

The typical inflation adjusted gold chart looks like this, and I will discuss some aspects of it, this is from Zeal (Adam Hamilton):

Alam Hamilton is one of the few gold writers to even be addressing this issue. I commend him for being years ahead of everyone else about this inflation adjusted gold question.

However, I wish to point out that this chart, and others like it use a method that takes present gold prices and tries to backwards them to the old days using a multiplier from the CPI index. You consequently get a high value of gold back in the early 1980's compared to today, ie gold in 1983 is really over $2000 today.

This is a very confusing method to look at this issue.

I have a much simpler way to do this.

What I do is take gold in 1983 dollars and hold its present price chart constant to 1983 dollars.

What I get is this chart, which is a modified chart from Kitco:

First, I have the usual Kitco historical gold chart back to 1974. Then I make the following calculations:

First a metric conversion:

I surmise that everything is at lest 3 times as costly in USD since 1983. Then I take the gold price in 1983 of about 500 then and compare what would be a 500 level today. In other words, if gold is $500 today, I divide by 3. That gives me $160. If gold is $500 today, its value in 1983 dollars is actually 165.

Now take the value of $700 gold today. Divide by 3. The real cost in 1983 dollars of gold today at $700 is actually $230!

In the Kitco chart above, the thin black line is my inflation adjusted gold chart HELD IN CONSTANT 1983 dollars. In fact gold is very cheap today! AT $700 gold is really $230 in 1983 USD!

My subscribers already know this, and I have a similar analysis for silver as well. Silver is closer to its 1983 adjusted value in USD as gold is. Gold is presently about half the 1983 USD value as it was. At $700 right now, gold is about half its real value achieved in 1983 when Volker stopped the USD inflation!

That thin black line you see above in the Kitco chart that I added is really the true inflation adjusted cost of gold today, and friends, you should definitely not be deterred from buying gold at the present deflated USD prices of $700, rather you should realize that you are really buying gold at about $230 in inflation adjusted terms back to 1983!

This is the primary reason that I have been telling my subscribers that gold is cheap at present day prices, and even if gold got to 1500$ now I would still buy it dollar for dollar now.

That's right. If I was faced with buying gold bullion for $1500 right now I would do it.

That is what this information is telling me, ie the inflation adjusted price of gold indicates that gold should be $1500 right now just to get even with the stabilized price it hit in 1983 when it stabilized at $500 then.

I have told my readers that we are only in the beginning of this gold bull, and probably not in what is usually called a stage 2 bull market.

What is driving gold right now is flight to safety that has absolutely nothing to do with these inflation adjusted calculations. The inflation adjustments for this gold market have barely even started.

To prove the point, even only adjusting for inflation since 1983, gold should now be at $1500 which it is not, actually it is less than half that.

The PrudentSquirrel Newsletter is a weekly gold and economic commentary. It is a big picture analysis of the precious metals markets. Stop by and have a look.

May 17, 2006

Christopher Laird
Editor-in Chief
www.PrudentSquirrel.com