Is Gold Cheap at $1,000 an Ounce?

Even I’ll admit that gold "feels" high to buy near $1,000 an ounce, only a hair off its all-time-high of $1,030 reached last March. No reason to pay that much, so the thinking goes, better to wait for a substantial decline before adding new exposure.

But referring to the March high as the “all-time-high” fails to take into account that, over time, inflation has eroded the purchasing power of our dollar. Even metals have failed to keep pace, despite their price run-up. To get the actual all-time highs, one must adjust for inflation, which as you can see from the graphs below, using actual Consumer Price Index (CPI) data, suggests most metals are actually at the prices only reached early in this decade -- still quite a ways off from their actual peaks.

To account for inflation since January 1980, gold would have to be trading for more than $2,600 an ounce, almost 175% over today's levels.


Source: Bloomberg, Rosewood Trading

Silver, which has fallen in price more than inflation has increased, would have had to have averaged $39.60 per ounce in August 2009 to have kept up with its January 1980 price adjusted for inflation.

Source: Bloomberg, Rosewood Trading

Regular readers will remember we highlighted platinum at $850 an ounce as an undervalued asset last December. The metal averaged $1,250 an ounce last month, but it would had to have averaged $3,440 to match its January 1980 price, in real dollars. It’s peak, in nominal terms, since 1980 was $2,040 in May 2008.

Source: Bloomberg, Rosewood Trading

Palladium, integral in the use of catalytic converters and other automotive systems, is now under $300 an ounce, but would have to have averaged close to $770 last month to match its 1980 price in real dollars. Its all-time nominal high of just under $1,040 per ounce was reached in January 2001 as Russian exports were disrupted.


Source: Bloomberg, Rosewood Trading

Legendary speculator Jesse Livermore famously remarked how a stock was never too high to buy or too low to sell. Although precious metal prices might "seem" high now, when viewed through the prism of inflation over time, it’s easy to argue many actually have quite a way to run.

Does the financial industry need greater regulations? Last month we noted how government regulation actually perpetuates fraud. Normally suspicious and attentive individuals essentially outsource their own due diligence and investigation to the government.

The Securities and Exchange Commision's own report on the Madoff Ponzi scheme, released earlier this month, confirms that thesis, as no fewer than 25 investors provided sworn affidavits they chose to maintain their accounts, open accounts or reinvest previous funds with Madoff specifically because the SEC had already investigated and examined him.

Said victim Angelina Sandolo: "[I] moved my investment directly to Bernard L. Madoff Investment Securities relying on the SEC's 1992 statement there was no indication of fraud."

Investor Shirley Stone said, "we gave a big sigh of relief when we read and heard that a government agency called SEC said there was no fraud. Since we were so sure that all was well if our government had checked we went directly into Madoff Investment Co... My generation was taught respect and trust for our government".

My point precisely. Why bother asking questions when “experts” at the SEC gave Madoff a clean bill of health?

Madoff himself would inform potential investors of the SEC's investigations as a means of quelling their fears, saying that it bolstered his firm's credibility that it has passed numerous examinations by the SEC.

Far from a benefit, regulation actually perpetuates further harm by disabling the free market's best watchdog: skeptical, self-interested investors with their own cash on the line.

Rydex, which pioneered the now burgeoning field of currency exchange-traded funds now aims its sights on the alternative investment space with the launch of GetAlts.com, a primer covering the basics, risks and potential rewards.

Source: GetAlts.com