Gold Isn't Anywhere Near Its High

Anthony Haddad's picture

Wednesday, October 14, 2009 - 4:24pm

by Anthony Haddad

Gold -- at more than $1,050 an ounce -- appears to be more expensive than ever.

But it isn't.

While it's true that it costs more dollars to buy gold than ever before, the value of the dollar isn't fixed. The dollar of decades before is not the same dollar we use today.

Today a U.S. dollar may buy one Canadian dollar, or a cheeseburger. Thirty years ago, a dollar might have bought two Canadian dollars or three cheeseburgers.

If, for example, we wanted to compare the relative wealth of Warren Buffett and Bill Gates today, we could add up the net value of each man's assets. Easy. If we want to compare their fortunes to, say, John D. Rockefeller's, it's trickier. Rockefeller's $1 billion net worth wouldn't even put him on the Forbes list today. But in 1916, that was one of the biggest fortunes ever amassed, one estimated to be worth at more than $300 billion in today's dollars.

That's the changing dollar.

So to compare the price of gold today against the price of gold in the past requires an adjustment for inflation. And once we do that, we can easily see that gold is, in fact, nowhere near its 1980 high of $2,193.

1980 Revisited?
In the late 1800s and early 1900s, Rockefeller and several of his contemporaries like Commodore Cornelius Vanderbilt and Andrew Carnegie built fortunes many times greater than the wealth anyone amassed in recorded history -- or since.

Could someone accomplish the same feat today?

It's possible. But Standard Oil doesn't get built every day.

In the same vein, the winter of 1979-1980 had some particular problems that don't exist today. Inflation was +14%. Oil was selling for about $40, $100 a barrel in today's dollars.

Given such uncertainty, gold was richly valued. Prices headed up for much of 1979. But the real catalyst that pushed gold into the stratosphere was the Soviet invasion of Afghanistan on December 27th, 1979. By January 21st, gold had risen from its December 27th price of $473 to $850. During the next two trading sessions, gold lost more than -20% of its value, and by March, all of the gains since the invasion had disappeared.

Platinum & Gold
Even though gold isn't near its all-time high, it still commands a relatively high price. While it could move up a few points, anything short of +14% inflation and a Soviet invasion of Afghanistan won't push it up anywhere near its 1980 levels.

Platinum is downright cheap. It usually trades about twice as much as gold: If gold is $500, platinum is $1,000. But since late 2008, platinum has been priced at a deep discount. While it has made up some ground since its crash, it still has a long way to go. It's now trading at about $1350 an ounce, just +30% higher than gold.

Three things could reset pricing to its historical norms. Platinum could gain +50%. Gold could fall by about -25%. Or, thirdly, some combination of the two could occur.

With an economic recovery seemingly underway and industrial output starting to improve, it's just a matter of time before platinum gains back much of the ground it lost in 2008. Since the beginning of 2009 it's up +41%, more than 20 percentage points better than gold. And in September platinum gained +10%, outperforming gold again.

There are two platinum ETFs on U.S exchanges. UBS E-Tracs CMCI Long Platinum Total Return (NYSE: PTM) and iPath Dow Jones AIG Platinum Total Return Sub Index (NYSE: PGM). Each fund tracks platinum using futures contracts and offers opportunity for investors who anticipate a rise in platinum.

Anthony Haddad does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.