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Five Hundred, Fifty Six Dollars, and Ten Cents
(January 13, 2006) On this date, gold prices closed at $556.10, a 25-year record high price in dollar terms. Those who have owned gold for a while are not surprised at the higher levels, but new buyers hesitate to pay record prices. Who is right? B.B. King, of course.
First, let’s examine this gold price a little more closely: Five hundred, fifty six dollars, and ten cents. That sounds like a lot of money. But with our cumulative experience of inflation in the last 25 years, it’s a lot less money than it used to be.

Let’s break it down, starting with the ten cents. In 1981 ten cents would buy you a candy bar, or five pieces of bubble gum. Today, you better save up a few dimes to buy that candy bar, and if you can even find a single piece of bubble gum, it will set you back at least 5c, probably 10c, reflecting a price increase of 250% to 500% in those 25 years.

(Incidentally, ten pennies in your pocket from 1981 would today contain about fifteen cents worth of pure copper. But not today's pennies. In 1982, the Mint switched over to our current 'penny,' which is made of cheaper zinc, with a thin copper coating. So the US Mint in the 20th century first eliminated gold coinage in 1933, silver coinage in 1964, and couldn't even afford to make coins out of real copper starting in 1982. And that, in so many words, is about as good a capsule history of the dollar's demise as any.)

Now let’s take a look at fifty six dollars. Today, that amount will buy about a tank and a half of gasoline if you drive an average sedan, or maybe a single tank if you’re fueling up a full-size SUV. In 1981, gasoline retailed for an average price of $1.35, meaning fifty six dollars would fill up that sedan about three times. And in 1981, $1.35 per gallon was a shocking increase from 1979’s average retail price of 88c per gallon.

Coincidentally, 1979 was the first year that gold traded as high as $550 per ounce. Fifty-six dollars, which today barely buys us a tank-and-a-half, in 1979 would have bought you some 63 gallons of gas at retail, enough to fill up your average sedan four times.

Which leaves us with our hypothetical 500 dollars. Now we’re into the real money. In 1981, the venerable bluesman B.B. King was singing these lines:

“I bought you a ten-dollar dinner,

And you said, ‘Thanks for the snack.’”

Mr. King was singing about a very extravagant meal (Ten dollars! Can you imagine!), and his companion’s unwarranted disdain for such. And to be fair, the song predates 1981 by quite some time. So it’s not a fair comparison at all, but if you’ve recently picked up the restaurant tab for a party of a few hungry and thirsty people, you know that several hundred dollars can easily disappear in one sitting.

A ten-dollar dinner? Today, you would most likely find that at a drive-thru.

Or, let’s take an alternate look at $500, not as a sum to be blown in an evening, but as part of what we have come to consider a more solid investment – real estate.

In 1981, the average new house cost $68,900. In other words, you could take 128 five-hundred dollar bills, and buy the average new single-family house in America. Using HUD data, we calculate that today’s average new home cost $214,000, or, 428 of these hypothetical five-hundred dollar bills. That’s more than a 3x increase.

The point of all this fooling around is this: $556.10 is in fact the highest gold price in 25 years when measured in nominal dollars, but “dollars” is a very fluid measure. If you adjust for inflation, there is really not much newsworthy about the price of gold in today’s US dollars being five hundred, fifty-six, and ten cents.

As Adam Hamilton wrote on 1/13/06 at his website,

“Gold last closed above $550 nominal on January 23rd, 1981, almost 25 years ago to the week. Yet adjusted for inflation an ounce of gold was really worth $1266 that day in purchasing-power terms. Thus in order to truly see the quarter-century gold highs that the financial media is wailing about, gold in today's dollars would have to head north of $1250…..It is not prudent or valid to compare today's dollars to dollars of decades past without adjusting for inflation. Whenever the financial media insists on doing this it is lazy at best and intentionally trying to mislead investors at worst.”

There’s no doubt that gold prices fluctuate. And that gold at some point in the future, probably soon, will sell for less than $556.10 per troy ounce. But by the end of 2006, will it be even higher? And by the end of this decade, much higher? No doubt.

The question is:

Is gold overpriced at five hundred, fifty-six dollars, and ten cents? Considering what else that sum might purchase in today’s dollars, we have to conclude, not hardly.


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