Although gold had risen 19 per cent this year to US$1072 ($1447) an ounce by October 14, consumer prices have almost tripled in the past three decades, eroding the metal's value.
Bullion hasn't kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record US$873 an ounce. In today's dollars, that would be US$2287, according to the US Labour Department's inflation calculator.
Record government debt and interest rates close to zero per cent are pushing gold higher for a ninth straight year, and options show investors expect the rally to continue.
When prices reached all-time highs, the contract with the most open interest was the December call to buy the metal at US$1200. The contract to purchase at US$1500 an ounce was the third biggest.
"Gold is not at any peak," said Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth, which manages US$58.5 billion in mutual funds and brokerage accounts.
"The world's money supply has increased and gold hasn't kept pace," he said. "We're now in a period where gold is catching up."
The US Dollar Index, which measures the currency against those of six major trading partners, fell on October 15 to the lowest level in 14 months, and has dropped about 7 per cent this year.
President Barack Obama has increased the nation's marketable debt 22 per cent to US$7.01 trillion to revive growth. Gold bulls say today's record borrowing and low interest rates mean the US Government will have to accept faster inflation as the economy recovers.
Investors buy bullion to preserve value during times of turmoil and economic stress.
Financial institutions worldwide have reported credit losses and writedowns of about US$1.62 trillion since the start of 2007, when the credit crisis began. The Group of 20 governments have pledged about US$11.9 trillion to ease credit and revive economic growth, the International Monetary Fund says.
"Gold is the hedge against currency devaluation," John Brynjolfsson, of hedge fund Armored Wolf LLC, told Bloomberg recently. He predicted bullion will top US$2000.
Banks have raised their gold estimates. On October 9, JPMorgan Chase said the metal will average US$1006 an ounce next year, compared with an earlier projection of US$950. Deutsche Bank forecast an average of US$1150, up 32 per cent from its estimate in July. Barclays Capital said on October 12 that "prospects for a run at US$1500 should not be underestimated" next year.
Gold would need to rise more than sixfold to top the 1980 record, using a more accurate inflation-adjustment, said John Williams, an economist and the editor of California-based Shadowstats.com. He said the Government has understated the cost of living over the past two decades with adjustments in the way it measures the basket of goods and services monitored by the US consumer price index, or CPI.
Gold futures for December delivery closed last week at US$1051.50 an ounce on the New York Mercantile Exchange's Comex division, gaining for a third straight week.
"If the methodologies of measuring inflation in 1980 had been kept intact, gold would have to hit US$7150 to be the equivalent of the 1980 record," Williams said.
The cost of living in the US rose 0.2 per cent last month, the Labour Department said last week. Compared with a year earlier, consumer prices fell 1.3 per cent. The CPI will drop 0.5 per cent this year, before rising 1.9 per cent in 2010, reflected by the median estimates of 61 economists in a Bloomberg survey. Annual increases averaged 2.8 per cent a year in the past decade.
In March 1980, inflation surged to a 14.8 per cent annual rate, two months after gold capped a four-year rally. Adjusted for the decline in the dollar's buying power since then, gold's October 14 record of US$1072 represents the equivalent of US$409 in 1980 dollars, the Labour Department calculator shows.
Since January 1980, the average price in the US of a pound of white bread has risen almost threefold, from about 50c to US$1.38 in August, and medical care has surged more than fivefold, department figures show. Fuel and electricity prices have more than doubled.
Today, the gap between gold's spot price and its CPI-adjusted equivalent is the widest ever. Gold hasn't been as effective a hedge against inflation as oil since the 1980s, said Matt Zeman, of LaSalle Futures Group in Chicago.
Crude passed its 1981 inflation-adjusted record two years ago. The cost of imported oil averaged US$39 a barrel in February 1981, after Iran cut exports, says the Energy Department.
That's US$89 in 2007 dollars, the Labour Department calculator shows. Oil reached a record US$147.27 on July 11 last year and closed at US$78.53 on October 16 in New York trading.
"If you bought gold in the 1980s, you're still losing money today," said Zeman, a metals trader. Gold prices in New York languished for two decades after declining from the 1980 record, dropping to a 20-year low of US$253.20 on July 20, 1999.
While bulls say gold is cheap, the inflation-adjusted price is 15 per cent above its 30-year average, Bloomberg data shows.
The Federal Reserve may limit gains by raising interest rates before inflation balloons, analysts said. Fed chairman Ben Bernanke said recently that policy makers will need to raise interest rates "at some point" to control inflation.
"When the economic outlook has improved sufficiently, we will be prepared to tighten," Bernanke said.
Fed moves to cool inflation and the Government's revenue needs will stop gold, says Jon Nadler, a senior analyst for Montreal metals dealer and refiner Kitco.
"These wild calls for several-thousand-dollar gold are typical of times when gold goes into uncharted territory," Nadler said.
"The Fed will pull the interest-rate trigger and the Obama Administration will, in addition, pull the tax-hike trigger before we get into any serious inflation. Once the man on the street gets in, the gold rally is likely over."
Gold held in exchange-traded funds climbed to records this month at Zuercher Kantonalbank and ETF Securities. Holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, are up 42 per cent this year. Hedge funds and other large speculators hold their most-bullish position ever in gold futures.
So-called net-long positions, or bets prices, increased by 6 per cent to 253,955 contracts in the week ended October 13, the Commodity Futures Trading Commission said.
The Philadelphia Stock Exchange Gold & Silver Index jumped 43 per cent this year, as Phoenix-based Freeport-McMoRan Copper & Gold tripled. Toronto-based Barrick Gold, the world's largest producer, fell 10 per cent. Barrick said last month it will record US$5.6 billion in third-quarter costs to eliminate fixed-price contracts as the company bets gold's value will climb.
At Jersey, Channel Islands-based GoldMoney.com, which held US$759 million of gold and silver for investors as of September 30, founder James Turk said bullion can climb eightfold based on the historical relationship between the metal and the Dow Jones Industrial Average. The Dow is up 10-fold since January 1980.
Gold and the Dow, which has gained 14 per cent this year to top 10,000 last week, were at about the same level during the Great Depression and the early 1980s, he said. On January 21, 1980, as gold futures surged to US$873, the Dow slipped to 946.25.
"The dollar is constantly being debased and inflated," Turk said. "By 2013, gold is going to be at US$8000 and the Dow will be at 8000."
Deutsche Bank said this month that the dollar will fall to US$1.60 a euro next year, a drop of 7.3 per cent from last week, because of "rising fiscal deficits and loose monetary policy".
Gold has moved in the opposite direction of the dollar over most of the past decade. The metal's correlation coefficient to the US Dollar Index is minus 0.8539, Bloomberg data shows. A correlation of minus 1 indicates two assets move inversely to each other, while a 1 would show they move in tandem. A reading of zero shows no correlation.
Philip Gotthelf, the president of Equidex Brokerage Group in Closter, New Jersey, says he expects gold to trade at US$1250 by year-end.
"Gold has been pushing higher because it's no longer just a hedge against commodity inflation, it's also a hedge against a change in world-monetary standards."
GOLDEN DAYS (Prices US$ per ounce)
* 1980: $873.
* 1980 inflation-adjusted: $2287.
* October 14, 2009: $1072.
- BLOOMBERG
Rush is on as gold bullion plays catch-up
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