Higher Inflation - The Real Price Of Gold

Higher inflation? Count on it.

You’ve heard the saying, “They don’t make ‘em like they used to”? Well, they don’t charge the way they used to, either. Nobody does. Try buying a loaf of bread for 50¢. Or a gallon of gas for $1.25. Nothing costs the same as it did in 1980. Nothing.

Except, maybe, gold.

That little anomaly has caused many an analyst to stare off in space. Not only is gold set to head even higher, the factors that may set it off are everywhere you look. And, really, that’s an understatement. It’s probably more accurate to say that they’re everywhere you look in their most extreme forms .

Still, as impressive as the gold bull has been, its price remains stuck in the days of disco and Jimmy Carter

Gold Getting Even Rarer

Has something happened to change gold’s dynamics these past 27 years? Has there been some gigantic gold find? Some Valdez Pipeline of precious metal that’s made gold as common as, well, oil? Uh uh. Quite to the contrary, actually.

Production has not only stalled, it’s been rolling backwards . The South African gold industry, for just one precious metal producer, looks like it’s running out of bullets. Back in 1970, 70 percent of the world’s gold came from that country. By the 21st Century, though, SA production had shrunk to a mere 14.5 percent of global output.

South Africa isn’t alone in this. “After peaking in 2001, world gold production has been steadily slipping. One reason for the lack in new supply is there haven’t been any big discoveries of gold deposits in a while, certainly not on the scale seen in the 80s and 90s. For the few discoveries that were made, the length of time needed to develop and extract their deposits has lengthened from four to seven years,” wrote Bernard Baumohl, Time magazine’s senior economics reporter.

Don’t count on higher gold prices reducing that four to seven year lag time any, either. Pierre Lassonde, president of Newmont Mining, the world’s largest gold mining company, gave this notable quote: “If gold was $1,000 an ounce, it still takes four to seven years to open a mine.”

That said, the price of gold remains stuck in this weird 1979-1980 time warp just as Michael J. Fox was in Back to the Future .

Gold At An “Inflation-Adjusted” $2,176

“In terms of today’s dollars, gold reached $2,176 in 1980.”

That startling observation is from Larry Edelson of Weiss Research, and what he means here is that gold isn’t just undervalued at today’s $700+ price, it’s a steal .

Edelson continues: “Even if it were to reach just half of its inflation-adjusted price, the yellow metal would zoom to more than $1,000 an ounce.”

Which, by any investor’s standard, would still be a steal. Edelson’s premise is that gold would “have to more than triple just to regain the same purchasing power it had 26 years ago!”

The funny thing is, gold is supposed to be the ultimate inflation barometer. Its price is supposed to honestly tell us, from generation to generation, just how ridiculously inflated the dollar has become. So what happened? What’s been keeping the precious metal from telling us the cold, hard truth? That’s a good question. Whatever the answer is, whatever mischief the central banks have been up to in manipulating the precious metal, it will all soon give way to the irrepressible pressure that’s been building.

Like Mount St. Helens back in 1980, gold may finally be ready to blow.

An Avalanche of Inflation on the Way

Back in 1980, the price of the average new car was just $7,609. According to Car and Driver magazine, the average cost today is something like $27,800. That’s a 265 percent increase , which represents nearly ten percent of “real” inflation a year for the past 27 years, a statistic reflected by the prices of many consumer products.

But you don’t have to be an analyst to know that real-world inflation bears little resemblance to the government’s official annual rate of 3.5 percent.

All you have to be is an adult who spends money.

Even so, even as bad as it’s been over those 27 years, it looks a whole lot scarier up ahead – especially with oil, the common denominator in our economy, staring at $100 a barrel. As it is, crude oil has quadrupled in about five years time…and some analysts are even pegging it at $150 a barrel by mid-08.

Only once before has a recession failed to follow a dramatic jump in the price of oil. And for some reason, as mind-boggling as the present leap in oil prices continues to be, it’s doubtful we’re about to make a second exception to that rule.

You’ve heard the saying, “a rising tide raises all boats”? Well, economically speaking, rising oil raises all prices . And to the degree that the current oil prices rise, expect the consumer prices we come face-to-face with every day to climb exponentially.

Why Gold Will Finally Snap

Analyst Christopher Laird likens gold to an overstressed fault line. He said “gold has an elastic effect in recapturing its value … it wallows in low levels until a snap effect occurs.”

Good analogy. That earth-shaking snap is currently about a quarter century overdue. And if you think today’s $700-ish gold price is about as high as gold’s going to get, you’ve already forgotten the middle part of this article. That’s the part that says gold needs to triple just to regain its 1980 purchasing power – the kind of profound snap that can finally set things straight.

There’s even a basis for predicting just such a gold snap, and it goes something like this:

Four separate times, between 1974 and 1980, you could have predicted rising gold prices just by looking at what oil was doing. There was a sequence to it – first oil would rise, then inflation, then interest rates, then gold. It’s been a very predictable freight train, and it happened four separate times over six years, culminating in gold reaching $850 in 1980.

Today, with gas well over $3.00 a gallon, that same freight train has already left the station. And just as with the 1974/1980 cycle, you can bet higher inflation will soon follow today’s record oil prices, then, somewhere down the road, higher interest rates have to happen, then higher gold.

And, this time, there should be enough of a frustration factor for gold to actually hit its honest-to-gosh, real-time, “adjusted-for-inflation” price.

You’ll probably want to be a gold owner before this higher inflation takes hold.

Source by Kevin A. Demeritt

Higher Inflation - The Real Price Of Gold