Inflation is a hard thing to pin down. You feel it in your wallet but measuring it accurately is very difficult. When I set out in business, I started one of the pioneering computer games company. The machine that set the stage was the Sinclair ZX Spectrum, know as the Timex 2680 in the US. It was $200. Now a $200 computer is infinitely more powerful, so while the price didn’t fall, the price per ‘compute’ absolutely crashed. The same goes for cars. The base car I bought in 1982 was only 20% of the sticker of todays base car, although the UK inflation number should have it at 33%.Even though today’s cars are way better the basic job of getting from A to B remains the same. So was inflation 5x or 3x or is it less because the modern car can go nearly twice as far of a gallon of gas and has lots of nice gadgets? Its very tricky to untangle it all.
So why do I care? Well apart from a certain morbid nostalgia I’d like to benchmark my investments in real terms and even more acutely I’d like to benchmark Gold.
Money, even when it was Gold, is not a static thing. An ounce of Gold in one place does not have the same value in another. This is why trade happens, and this is why people sell and buy Gold itself. When prices are in flux you have to start pulling mental contortions to try and estimate what the value of your investments is, so you can trade them for a maximal outcome. The ‘buy and holders’ don’t care as don’t the precious metal stackers, but for me, I’m a buyer and holder at the current price around $3200 an ounce but a $10,000 you can have it all, right here, right now and hurry up about it!
So what is the potential market top for Gold?
So lets try and find a distant datum to benchmark Gold’s long term inherent value. What was the price of bread in 1910 when $20 was an ounce of gold. Well hold on a moment, technology should have crushed the price of bread since those days. Cheaper wheat, lower manufacturer costs should have distorted that comparison by quite a bit. Back then a loaf cost twice what it does today when you adjust for basic wages, but then again there was no income tax back then. This demonstrates the problem. Prices are the result of a huge confluence of factors and easily get conflated into a fuzzy mess of comparatives.
So here is my bodged solution. Take a basic activity, as low tech as possible and compare. I choose a haircut. It’s a person with scissors, in a room with light and a chair and a wash basin. Its you, them and snippety snip. (Meanwhile feel free to find your own datums and post them in the comments.) Apparently, the cost of an everyday haircut was 25c around 1910 and today its $40. That’s 160x. A $20 Gold Eagle is 1 ounce of Gold. 160 x 20 = $3200, todays price of Gold. The price of a haircut in 1980 when Gold hit $843 was $8, 20%, like my first car, of what it costs today. That would have Gold at its 1980 all time high of its day at $4215 an ounce.
That seems a pretty good basis to proceed on.
Here is a chart of that.
That looks pretty optically strong to me, which of course is purely subjective, but the way to use this kind of chart is to see if the future actually sticks reasonably close to the trajectory. If it does, then the basic for projecting it in the first place would seem to be highly correlated to reality. You can do this for your own theories too, you should find that useful, it will certainly create a picture of why you went long or short in the first place. The more the real path diverges from your speculation/guess/well argued thesis, the more the market is telling you whether you need to go back to the drawing board or not. Charts are a tool but seldom an oracle.
So to my eye this chart begs the potential of even higher levels……
STOP, speculation is just that, it is wondering. If you are going to wonder, you then have to explain how that might come to pass. The explanation is, if the dollar falls, gold will go up in dollars but not in haircuts. Consider this.
Consider this ugly, in more than one way, picture of what happened to the French Franc. (This was part of an article about my ‘dramatic increase in inflation’ stance when Covd kicked off, while the accepted wisdom was predicting deflation.) It can be the same story in the near future with QE a strong possibility to prop up Treasuries, if bonds go sour. With re-accelerating inflation on the horizon, another 5%+ inflation over the next 4 years could easily see $5000 an ounce Gold.
For now I see that over $4000 an ounce I will start anticipating a top. Im an out early kind of investor liable to wake up at 3am to check the Gold price as it approaches and as such need a good reason to hold rather than want to flip it into something with more upside. However, there is plenty of time for things to get worse to boost the upside further.
The real problem is this:
While you might blame the previous administrations for a $1tr deficit, you can place the stock markets frothy $60tr+ value on them also, oh wait that was a few days ago …sorry $50tr+.
The rescue of the banks and markets in the 2007 GFC did Gold no harm at all, so all in all, printing to rescue economies in extreme situation is a recipe for further Gold appreciation so it’s a golden road ahead, but in the end that isn’t good news, it’s the result of lots of bad news ahead.