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While We Weren’t Watching, Gold Climbed
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(August 8, 2005) August begins the 10th month of gold trading between $418 and $458, as gold climbs 2% in a week to $438. In a word, the gold market has been flat, not unlike the past 26 years during which gold has traded, in unadjusted dollar terms, at between $250 and $850. So when does gold inflate?
Where have we seen inflation in US dollar prices over the past decades? A short list would include food, shelter, fuel, medical expenses, automobiles, entertainment, travel, insurance, hotel rooms, most consumer goods, and services of all types. In other words, most everything that you might spend your money on has gone up in price over the past couple of decades, and not by just a little.

On the investment front, stocks saw an eighteen year period of inflation, from 1982 until 2000. Bonds began their price rise in 1981, a bull market that arguably continues to this day. For decades now, the real estate market has ‘suffered’ price inflation, though today such inflation is the homeowner’s friend (and, for many, their major retirement account).

Where have we not seen inflation? For the most part, in certain consumer goods, such as clothing and electronics, due to overseas production under increasingly efficient production methods, often from a powerful combination of both high-tech and cheap labor.

What else hasn’t inflated over the past couple of decades? The price of gold in US dollars. Back when inflation was seen as a unified and omnipotent force, gold was the logical refuge for those losing faith in the dollar’s buying powers. In this era of inflation/deflation uncertainty, gold has fallen off the radar for the general public in the US.

We have seen that price increases are by no means inevitable across the whole spectrum. What we have now is rolling inflation, not the monolithic force that we perceived back in the 1970s when all prices seemed to increase in lockstep.

Simply put, money chases goods under laws of supply and demand. For a long while, peaking around the year 2000, money chased equities. For the past few years, it's flowed into real estate. The same laws of supply and demand caused oil to trade today for $64 a barrel.

Prices go up, and prices go down, but due to the virtually unlimited production of our synthetic medium of exchange, that low-calorie currency that we call the dollar, the sure bet in the long run is that prices will climb ever upward. And that's inflation.

So we're in the fourth year of gold's stealth market. In 2001, gold bottomed out at $257.00. Gold's lowest dollar price in 2002 was $277.90. In 2003, gold got no lower than $319.90. In 2004, gold floor was $375.00. And this year, gold so far hasn't traded below the $411.10 it reached back in February.

And if the real estate bubble pops in a monetary environment like today’s, with currency weakness and fundamental value erosion in the dollar, euro, yen and pound, gold is a very good bet to be the next thing that fast money chases.

 

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