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| Updated: Oct. 7, 2007 |
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October 7, 2007 Gold has risen to $750, $80 below its all time high of $830/ounce in 1980. It hit its 10-year high in the last few months. I had expected to see it close out the year over $800/ounce, and it may, in fact do just that. However, some dark clouds are on the horizon. Reports from consumers in the mid east are showing that the consumers are reluctant to purchase gold, thinking it will become cheaper in the future. Many are selling gold they purchased for less money to reap profits. Since these consumers purchase high quality jewellery for both fashion and asset value, they have dual motives to their gold purchases. But don't most people? Only a few would spend thousands of dollars for a gold trinket if they thought in the future, it would only be worth a fraction of what they were paying for it today. Since about 70% of all gold is jewellery, any consumer retrenchment from the market will have significant influences on the gold market. If demand diminishes significantly, the price will follow, or supply will shrink. For an economic comparison, in 1980 when gold hit $830 per ounce, the annual inflation rate was a huge 13.85%, inspired by the Democratic spending programs. However Ronald Reagan became president in 1980 and instituted much needed fiscal policies that brought the greatest economic expansion this country has ever seen, and reduced the inflation rate to 2-4% annually. Those liberal Democrats often jeered and ridiculed these economic policies, but they brought fiscal sanity to the US government. Now for what this might have to do with the current price of gold, we need to look at the real value of gold. In 1980, gold was valued at around $600/ounce (average). For one 1980 dollar, it would take $2.79 2007 US dollars to purchase the same amount, due to inflation. Now, using a comparative value of 1980 gold at $600/ounce, it would have a value of $1,674/ounce in 2007. Now there is no doubt that, like all those dot coms in 2000, gold was over priced at its 1980 prices, so if a more reasonable 1980 value of $400/ounce were used it would have a 2007 value of $1,116, currently. Therefore, at $740 per ounce, is gold over priced in 2007? I don't think so, and inflation tends to show that it is not overvalued at this price, but it is undervalued. Yes, at $740 per ounce gold is still a good bargain, inflation adjusted, and it will be so until it exceeds the inflation adjusted value for an ounce of gold. Couple that with a long range supply problem, that less than 40 years of gold reserves currently exist in the world, and gold is a extremely good value at $1,000 per ounce. So, while profit takers can be expected in any market, stocks, bonds, gold, etc., gold is still a good value and it will continue to rise in price and value. -------------------------------------------------------------------------------- But that's just my opinion. Charles Kubach Mine-Engineer.Com |
