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Published: October 14, 2009
Gold -- at more than $1,050 an ounce -- appears
to be more expensive than ever.
But it isn't.
While it's true that it costs more dollars to buy gold than ever
before, the value of the dollar isn't fixed. The dollar of
decades before is not the same dollar we use today.
Today a U.S. dollar may buy one Canadian dollar, or a
cheeseburger. Thirty years ago, a dollar might have bought two
Canadian dollars or three cheeseburgers.
If, for example, we wanted to compare the relative wealth of
Warren Buffett and Bill Gates today, we could add up the net
value of each man's assets. Easy. If we want to compare their
fortunes to, say, John D. Rockefeller's, it's trickier.
Rockefeller's $1 billion net worth wouldn't even put him on the
Forbes list today. But in 1916, that was one of the biggest
fortunes ever amassed, one estimated to be worth at more than
$300 billion in today's dollars.
That's the changing dollar.
So to compare the price of gold today against the price of gold
in the past requires an adjustment for inflation. And once we do
that, we can easily see that gold is, in fact, nowhere near its
1980 high of $2,193.
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1980 Revisited?
In the late 1800s and early 1900s, Rockefeller and several of
his contemporaries like Commodore Cornelius Vanderbilt and
Andrew Carnegie built fortunes many times greater than the
wealth anyone amassed in recorded history -- or since.
Could someone accomplish the same feat today?
It's possible. But Standard Oil doesn't get built every day.
In the same vein, the winter of 1979-1980 had some particular
problems that don't exist today. Inflation was +14%. Oil was
selling for about $40, $100 a barrel in today's dollars.
Given such uncertainty, gold was richly valued. Prices headed up
for much of 1979. But the real catalyst that pushed gold into
the stratosphere was the Soviet invasion of Afghanistan on
December 27th, 1979. By January 21st, gold had risen from its
December 27th price of $473 to $850. During the next two trading
sessions, gold lost more than -20% of its value, and by March,
all of the gains since the invasion had disappeared.
Platinum & Gold
Even though gold isn't near its
all-time high, it still commands a
relatively high price. While it
could move up a few points, anything
short of +14% inflation and a Soviet
invasion of Afghanistan won't push
it up anywhere near its 1980 levels.
Platinum is downright cheap. It
usually trades about twice as much
as gold: If gold is $500, platinum
is $1,000. But since late 2008,
platinum has been priced at a deep
discount. While it has made up some
ground since its crash, it still has
a long way to go. It's now trading
at about $1350 an ounce, just +30%
higher than gold.
Three things could reset pricing to
its historical norms. Platinum could
gain +50%. Gold could fall by about
-25%. Or, thirdly, some combination
of the two could occur.
With an economic recovery seemingly
underway and industrial output
starting to improve, it's just a
matter of time before platinum gains
back much of the ground it lost in
2008. Since the beginning of 2009
it's up +41%, more than 20
percentage points better than gold.
And in September platinum gained
+10%, outperforming gold again.
There are two platinum ETFs on U.S
exchanges. UBS E-Tracs CMCI Long
Platinum Total Return (NYSE: PTM)
and iPath Dow Jones AIG Platinum
Total Return Sub Index (NYSE: PGM).
Each fund tracks platinum using
futures contracts and offers
opportunity for investors who
anticipate a rise in platinum. --
Anthony Haddad
Staff Writer
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