The Real Price of Gold

By: Adrian Ash | Fri, Sep 18, 2009
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Two charts and three measures of gold's "real" price today...

GOLD'S CURRENT price-tag of $1,000 an ounce suggests big doubts over the US Dollar, its domestic economy, and its status as the world's No.1 reserve currency.

Or so we guess after 10 years of watching it quadruple from two-decade lows. But gold investors (old, new and everywhere) should note that this decade's bull market in bullion is about much more than the greenback.

Here are three ways of judging what you might call the "real price of gold" instead.

#1. The Global Gold Index

Gold has risen against all world currencies since the start of 2001, very nearly tripling on average and hitting record highs against everything bar the Japanese Yen. (Tokyo gold buyers are still waiting for a near-double to the peak of Jan. 1980...)

Introduced in July 2008, BullionVault's Global Gold Index is a stab at mapping this trend. It monitors "real gold" by plotting the daily price in terms of the world's ten most important currencies, averaging their moves by size of the issuing economy.

Thus the Global Gold Index currently starts with the US Dollar gold price, and then takes in the gold price for Eurozone buyers, Japan, China, the UK, Russia, Brazil, Canada, Mexico and Australia - as per the latest World Bank and IMF data. (It's rebased each year to accommodate changes in that league table of gross domestic product; India, the world's hungriest physical gold market until the start of this year, flips in and out.)

Not quite the price of gold for everyone worldwide, this "real" value does at least cover 2.5 billion people who account for over two-thirds of world economic activity. It starts at 100 on New Year's Day 2000, hitting a record peak for this decade in May 2006, and then all-time record peaks in March 2008 and then Feb. 2009.

Currently, the Global Gold Index is trading some 5% off that top, rising strongly into Sept. '09 so far.

#2. Gold vs. the Cost of Living

What about inflation; has the ultimate "inflation hedge" (as most commentators and analysts still mistake it) out-done the cost of living?

Given how suspect inflation data can be (wherever you live), let's roll our third "real" gold price into this picture too, comparing gold against the cost of raw, productive materials as bought and paid for in the market-place...

This chart shows the Dollar gold-price adjusted for official inflation in US consumer prices (the gold line). Jan. 2000 marks the start of our indexation. You're looking at gold priced in Y2K dollars, left-hand scale.

The chart also maps the "real" price of gold in terms of raw materials prices (dark red, right scale), indexing it against the CRB's Continuous Commodity Index of the most-heavily traded 19 natural resources - crude oil, corn, soy beans and the rest. (Again, Jan. 2000 is our starting point for the maths, indexing the real price of gold in commodities at 100.)

But is gold cheap or dear right now? Three observations:

Still, the Noughties come fifth out of the last eleven decades both for "price stability" and "low inflation". And gold's performance in the face of rising consumer prices is varied to say the least...

Decade
Starting...
Consumer Price
Change %
Gold's Dollar-Price
change %
Change in Gold's US
Purchasing Power %
1900 25 0 -20
1910 100 0 -50
1920 -16 0 19
1930 -16 69 101
1940 72 0 -42
1950 25 0 -20
1960 29 16 -10
1970 105 745 312
1980 63 -38 -62
1990 33 -27 -45
2000 27 258 (to date) 181

Most significant perhaps for the fate of Dollars, gold and inflation, is the fact that real commodity prices have in fact halved over the last fifty years. Adjusted for US inflation, they were never cheaper than at the start of this decade.

The decline in real commodity prices between June 2008 and Feb. '09 was comparable only with their doubling in 1972-73. Dropping 40% inside eight months, real commodities fell faster than any time on the CRB's five-decade record.

If this decade's bull market in gold were only about inflation and commodity-price fears -whether priced in US Dollars or anything else - gold would not be trading four times higher above $1,000 today.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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