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The Misguided Interpretation of Historical Gold Prices

Gold bears are on the prowl again, having apparently recovered from their 10 year scorching, and it looks like some are launching a new counter-offensive.
Exhibit A:

The gold chart below was included in a recent post by John Ameriks of Vanguard. It shows gold prices over the last 139 years (1871-2010), adjusted for inflation.

Price of Gold

The intent behind these types of charts is clear. It makes gold look very bubbly indeed.

Mr. Ameriks furthers his bearish gold argument thusly:

Bottom line: Any value that gold has as an investment appears, historically, to have accrued to investors who had a position prior to certain episodes of economic or financial distress. And to generate truly eye-popping returns from a gold-based strategy, you’d have needed to be selling at the peaks of these past price spikes, not buying.

The basis for making an investment in gold now is a conviction that the worst is yet to come. I’m not saying it can’t happen. But looking at how far these prices have come already, and thinking about the kinds of truly disastrous events that are included in this 140-year period, I’m skeptical.

First off — Yes, of course the worst is yet to come. Have you heard about the state of state governments? The double dip is getting rolling, and QE 2.0 is right around the corner. For more on that see this must-read piece from DoctorHousing Bubble.
And regarding the use of long-term charts to predict future prices, it is folly. In 1472 the inflation adjusted price of silver is around $800/ounce.  Is it headed back there any time soon? No, though I would welcome the move.

Price of Silver

Adam Sharp
BearishNews.com
Originally posted here.




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Leave a comment
  • Anonymous on August 18 2010 said:
    The first gold chart does not make much sense. Before 1930, the US was on a gold standard which means that the Dollar price of gold could not have fluctuated before that time. Adjusting for inflation makes only sense after 1971 when the Dollar became a floating currency versus gold.

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