Welcome new reader!

Financial news I consider important, with my opinion, which is worth as much as you paid for it.
Please click HERE to read a synopsis of my view of the financial situation.

Tuesday, February 17, 2009

Value of Gold, in USD

As my avid readers have noted, I have been obsessing over GDX when to buy and hold. One thing I find interesting about my own torn commitment is I truly believe GDX will hit 100 if not 200 a share in the next few years. Friday's price is about $35. So selling at any price is pretty much the wrong play.

But what I want to do, is to buy into gold miners to the point of I'm comfortable holding for the long ride up. And what I may be foolishly trying to do is get in at a near term bottom. Even with my belief GDX will go much higher, it would be hard to go 90% into miners then endure a GDX correction from 35 to 25 or lower before regaining value.

In any event, I wanted to share with you one perspective on gold. If you pull up a chart, it will show that gold hit a "high" of $850 an ounce in 1980, and more recently a high of over $1K an ounce in summer of 08. To most, this looks "topish", like gold has hit its old high, so how much higher can it go?

Well, one concept I explained is a previous post is there is NO such thing as absolute wealth. All wealth (assets) are relative to each other. Therefore, it must be asked, what are we using to "judge" gold to be worth $850 an ounce in 1980?

Answer: 1980 dollars, NOT 2009 dollars. To understand how much gold was worth back in 1980, you need to take 2009 dollars and adjust for inflation back to 1980.

So how much was gold worth back in 1980 in 2009 dollars? About $2,320.00 dollars, using Government US inflation statistics for US Retail Price inflation between 1914-2008.
Therefore, in current US Dollars, gold has not even come close to reaching "new highs" in absolute gold valuation. In these fearful times, to me it isn't unreasonable to expect gold to approach, if not pass it's old highs.

Some skeptics reading this may say "US government inflation numbers are not to be trusted". I agree. US Government inflation has been sub-categorized to core inflation, and other sub-inflation categories. Politics has influenced how inflation is calculated. A web site called "shadowstats.com" has it's own metric to record inflation. Using shadowstats.com US Retail Price inflation 19702-2008 metrics, the number of 2009 dollars to buy 1 ounce of gold in 1980 is $7050.00.

There are numerous tools on the web for calculating inflation, click here for the one I used.

In any event, this clearly shows gold has a much higher potential before reaching significant resistance to price acceleration. About $2,000 an ounce is when to start considering getting protective.

And hence why my own nervousness to commit to GDX at $36 is pretty much foolhearty. I will keep my GDX position, and attempt to hold stead fast, and slowly just add no matter where the price goes to. In addition the small gold miners I have I will remain rock solid and not sell.

No comments:

Post a Comment