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Gold Has Already Inflation-Adjusted to Its 1980 Peak

Have you seen this chart that's been making the rounds? Among other useful things, it shows the gold price adjusted for inflation over the past 223 years.

Notice the 1980 vs. 2011 levels.


This chart tells us that on an inflation-adjusted basis, the gold price has already matched its 1980 peak.

Does this signal the gold bull market is over? This information suggests it is, because the 2011 peak of $1,921 is the equivalent of the mania's $850 peak in 1980. If it's already matched that blow-off top, then perhaps our expectation that gold will go higher is indeed misguided.

“It was a nice ride, but it's time to pack it in. Sell your gold.”

Well, based on the above chart, that's what you might hear from a mainstream analyst, government official, or Internet blogger.

But based on research much more sound than a casual observation, I can tell you that conclusion is wrong. Here are the reasons why, starting with the most obvious…

Gold Has NOT Inflation-Adjusted to Its 1980 Peak

Most of you know that the methodology used to calculate the Consumer Price Index (CPI) has undergone numerous alterations since 1980. As a result, the above chart can't make an accurate comparison. Do you prepare your taxes today with 1980 tax forms?

For an apples-to-apples comparison, we must calculate gold prices using the CPI's 1980 formula. And for that, who better to ask than John Williams of Shadow Stats?

I asked John to apply the CPI formula from January 1980 to the $1,921 gold price in 2011, to give us a more accurate inflation-adjusted picture. Here's what the data show.

If we inflation-adjust the gold price with the CPI formula used in 1980, the monthly average for January 1980 would be the equivalent of $8,598.80 today. The precise peak—$850 on January 21, 1980—isn't shown in the chart and would equate to a whopping $10,823.70 today!

This paints a completely different picture than the first chart. The current CPI formula grossly dilutes just how much inflation has occurred over the past 34 years. It's so misleading that investment decisions based on it—like whether to buy or sell gold—could devastate a portfolio.

This could easily be the end of the discussion, but there are many more reasons that demonstrate the gold price has not matched its 1980 equivalent…

Percentage Rise Has Been Much Smaller

It isn't just inflation-adjusted numbers; the percentage climb during the 1970s bull market was dramatically greater than what we experienced from 2001 to 2011.

Here's a comparison of the percentage gain during both periods.

From the 1970 low to the January 1980 peak, gold rose 2,346%. It climbed only 535% from the 2001 low to the September 2011 high, nowhere near mimicking that prior bull market.

Silver Scantly Participated in the 2011 Run-Up

After 31 years of trading, silver has yet to even reach its nominal price from 1980. It surged to $48.70 in 2011—but it hit $50 in January 1980.

On an inflation-adjusted basis, using the same data from John Williams, silver would need to hit $568 to match its 1980 equivalent.

The fact that silver has lagged this much—when its greater volatility would normally move its price by a greater percentage than gold—further shows that 2011 was not the equivalent of 1980.

No Bubble Characteristics in 2011

I'll get some arguments from the mainstream on this one. “Of course gold was in a bubble in 2011—look at the chart!”

Yes, gold had a nice run-up that year. It rose 38.6% from January 1 to the September 6 peak. Anyone holding gold at that time was very happy.

But that's not a bubble. One of the major characteristics of a bubble is that prices go parabolic.

And that's exactly what we had in 1979-1980…

  • In the 12 months leading up to its January 21, 1980 peak, gold surged an incredible 270%. In contrast, the year leading up to the September 6, 2011 peak, the price climbed 48%—very nice, but hardly parabolic, and less than a fifth of the 1970s runaway move.

Comparable Price Moves? So What?

This is probably the strongest argument of all. It doesn't matter how the price compares to a prior bull market; what matters are the factors likely to impact the price today. Are there reasons to hold gold in the current environment—or do the circumstances suggest the need is small or even nil?

First, a comparison… Apple Computer surged 112% in 2007. After such a run-up, surely investors should've dumped it, right? You might be disappointed if you did, since it ended the year at $180 and trades today at $525. In fact, even though it had already risen dramatically, and even though it crashed with the market in 2008, there were plenty of solid reasons to buy the stock then, not the least of which was the introduction of the iPhone that year.

Should we sell gold because it rose 535% in a decade? As was the case with Apple, that's not the right question.

The more relevant questions for gold are…

  • What will happen with the unprecedented amount of money that's been printed around the world since 2008?

  • Why are economies still sluggish after the biggest monetary experiment in history?

  • Global debt is at never-before-seen levels; how can this conceivably be paid off?

  • Interest rates are at historically low levels—what happens when they start to rise?

  • Regardless of your political affiliation, do you trust that government leaders have the ability and fortitude to take the necessary actions to restore the economy?

If these issues were absent, maybe we'd reconsider our position in precious metals. But until the word “healthy” can honestly be used to describe our fiscal, monetary, and economic state, gold should be held as a hedge. In the meantime, these are exactly the kind of circumstances gold is designed for.

There's one more reason…

No Global Phenomenon in 1980 (Next Time It Will Be)

In the 1970s, the “mania” was mostly a North American phenomenon. China and most of Asia didn't participate. If inflation grips the world from all this money printing, there will be a much greater demand for gold than in 1980.

When that day comes, there will be severe consequences to those who have no (or an insufficient amount of) bullion. Not only will the price relentlessly move higher, but sourcing it may be very difficult.

The message here is clear, my friends. Regardless of the measure, gold has not matched its 1980 peak. And the reasons to own it have not faded. Indeed, they have grown.

Continue to accumulate.


Jeff Clark is editor of BIG GOLD, and a regular contributor to the Hard Assets Alliance.

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