Tuesday, September 15, 2009

Golden Years

Last week, we noted that gold futures had popped up to $1,000 an ounce; prices have now stayed at that level for a couple of days. One reason for that is the fear of inflation that has been floating around. Precious metals have long been a popular hedge against inflation.

Gold, silver, and other metals have long been seen as sort of an alternative currency when the paper currency start to get beaten down, as the dollar has been lately. The greatest price spike in the history of gold, as many of you will remember, took place around 1980, at a time of great inflation. Back then, the price of gold peaked at $850 an ounce. But remember, because of inflation, that price is equivalent to well over $2,000 an ounce in today's dollars.

There are two ways to look at that price spike:

1. The price of gold today is far below its historical inflation-adjusted high, so there may be room for more upward movement.

2. Following that 1980 high, gold went into a bear market for more than two decades, and didn't reach that lofty price again until January 2008. And it's never come close to matching that 1980 peak in inflation-adjusted terms.

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