Record Prices And Record Risks In Gold
All that glitters is not always a golden opportunity
By John Waggoner
USA Today
The U.S. mint is selling a lot of gold, too. The mint sold 49,000 gold eagle bullion coins in February, compared with 9,500 a year earlier.
In fact, as gold hovers near $1,000 an ounce, the whole nation seems to be trading gold.
"It's hot," said Eric Vallow, manager of Lev's Pawn Shop in Indiana. People are bringing in gold jewelry and coins to sell, Vallow says. And on days when gold takes a tumble, as it did Wednesday and Thursday, he's happy to buy.
Gold prices bottomed in April 2001 at $255.95 an ounce. They've marched more or less steadily upward since then. Gold has gained $719.05, or 281 percent, from its 2001 low.
Life hasn't always been so good for gold aficionados. Gold peaked at $850 an ounce in January 1980. Adjusted for inflation, gold would have to hit $2,144 an ounce to match its 1980 peak.
And that's one argument for buying gold, which is a hedge against inflation. As the value of paper money deteriorates, the value of gold rises, because gold tends to keep its buying power in times of inflation and economic uncertainty. If the price of gold were to catch up to inflation, it still has a 100 percent move in front of it.
The Long View
The $850 peak in 1980 was a classic speculative blow-off top: Gold had soared 66 percent in just 14 trading days. The $850 gold price was available for just one frenetic trading day. The average price of gold during 1980 was $613, according to gold bullion dealer Kitco. Using a slightly more rational starting point, gold would need to hit $1,570 an ounce to equal its 1980 level - still a colossal gain.
Gold averaged $307 an ounce in 1979, just one year before the 1980 peak. Using that as a benchmark, gold has already caught up with inflation: The inflation-adjusted equivalent of $307 in 1979 is $893 in today's dollars, according to the Bureau of Labor Statistics.
But there are reasonable long-term arguments for gold:
• Inflation. Gold tumbled from 1980 through 2001 in part because inflation was low, and people eventually stopped worrying about it. But people are fearing inflation now: The price of oil has risen above $100, for example, and the price of wheat has leaped to $11.27 a bushel from $4.74 a year ago. Though the government's consumer price index has gained 4.3 percent since January 2007, big price jumps in everyday items can spark an inflationary mindset. That's good for gold.
• The dollar. Gold moves in the opposite direction of the dollar, and the dollar has been on a toboggan run downhill the past 12 months. A euro now costs $1.54, versus $1.31 a year ago.
• The debt. The United States has $9.4 trillion in debt outstanding, equal to about 67 percent of the U.S. gross domestic product. In 1980, federal debt was equal to 33 percent of GDP. Some argue that eventually, the government will succumb to the temptation to get out of debt by printing more money, which is inflationary.
• Supply. Should someone find a gargantuan new gold field, then the price of gold (all things being equal) would tumble. If someone has struck gold, he or she hasn't told anyone. And even if someone does find a gold vein, it takes years to open a new gold mine.
The Short View
If the long-term argument for gold is a reasonable one, the short-term argument isn't quite as strong, says John Derrick, director of research at U.S. Global Investors, a fund company. "In the short term, we're due for a correction," he said.
The main reason: Barring a 1980-style blow-off, the price of gold is up too far, too fast.
"We've moved a fairly large amount in a quick period of time, and history tells us we're due to correct," Derrick said. He thinks a drop to about $910 or so is possible.
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