With the price of gold rising above $866, it has surpassed the record high of $850 set in January 1980. Some market watchers have show some irrational exuberance with predictions about where the price is going and what investors may consider. Few have picked up on the actual worth of gold by today’s standard is worth less than in 1980 and not as exciting as it is being made out to be.
Let me explain… money is a commodity that is traded openly on the markets. As a commodity, it is bought and sold by investors whose value is based on how the market perceives the strength of its buying power. When prices go up as the purchasing market demands more to meet its obligation, the value of the commodity goes down. Other factors include the amount of money in circulation and the return on the investments made with that money. This is why the dollar has taken a beating since the beginning of the mortgage crisis as the Federal Reserve Board of Governors adds liquidity (more money) to the market to stimulate growth.
The impact of inflation on money is the difference in its buying power. Thus, if you wanted to have the same buying power that $1 would buy in 1980, you would have to spend $2.55 today. In simple terms, you are paying 155-percent more for goods and services today than you were paying in 1980. When looking at the numbers, investors should consider the impact of inflation when purchasing a commodity like gold.
Since this is about gold, if we look at it in terms of buying power, if you bought gold at its record high price of $850 in 1980 and held it until today, the price of that gold adjusted for inflation is $2,168.09. Which means that if you sold that gold at today’s market price of $866, you would have made $16 in real dollars, but you would have lost $1,302 in your economic buying power.
As an interesting side note, under the current tax law you would have to pay capital gains tax on the $16 “profit.”
Commodities is a very difficult market to earn a good return on investment. Professionals get higher returns by trading shares, futures, and other financial instruments based on the commodity. Owning gold as a bullion investment is very risky. Numismatic gold may be different in that its price can also be tied to the numismatic value of the coin and not just the metal value. I am sure the owners of coins like 1907 and 1927-D Saint Gaudens Double Eagles would agree!
Before I wrap up this posting, the highest price for oil in 1980 was $38 per barrel. Adjusting for inflation, that would be equivalent to buying oil at around $96 per barrel. Interestingly, that is about the average for the cost of oil today. Economically, if we are using 1980 as the benchmark, we are not paying any more for a barrel of oil today than we did in 1980. Although other market factors impacts the economy differently today, think about the economic climate that may affect the 2008 elections and those that had an impact in 1980.