Gold is a traditional hedge against inflation but the price also rises with it. Gold was not a savvy investment for about 20 years, 1980 – 2001 as the dollar was stong. Moreover, it is not a great investment in deflationary periods (see: 2009).
The game of investing in gold is a fine line of hedging inflation and increasing worth vs alternative investing and maintaining worth. If the US were to back all of its dollars 100% by gold (circa pre 1933) or even fractional percentage (1933 – 1974) gold prices would sky rocket, because the gold would have to be repriced (revalued) in accordance to the volume of dollars in circulation.
In January of 1980, gold reached $825.50 an ounce. This is also the time around 13% mortgage rates and 8% – 12% CDs. But, looking at the following chart for average inflation per year from 1980 to today we see that this $825.50 an ounce is worth much more today.
Average inflation per year 1980 – 2010 from Inflation Data.
1980: 13.58% ----- 1990: 5.39% ----- 2000: 3.38% ----- 2010 (Jan – Sept): 1.77%
1981: 10.35% ----- 1991: 4.25% ----- 2001: 2.83%
1982: 6.16% ------- 1992: 3.03% ----- 2002: 1.59%
1983: 3.22% ------- 1993: 2.96% ----- 2003: 2.27%
1984: 4.30% ------- 1994: 2.61% ----- 2004: 2.68%
1985: 3.55% ------- 1995: 2.81% ----- 2005: 3.39%
1986: 1.91% ------- 1996: 2.93% ----- 2006: 3.24%
1987: 3.66% ------- 1997: 2.34% ----- 2007: 2.85%
1988: 4.08% ------- 1998: 1.55% ----- 2008: 3.85%
1989: 4.83% ------- 1999: 2.19% ----- 2009: -0.34%
Figuring in year over year inflation one dollar in January 1980 has the same purchasing power as $3.01 today. One ounce of gold worth $825.50 in 1980 is worth approximately $2487.48 2010 dollars. So, while gold is tipping the scale in the $1400 an ounce range, that is only about the $465 range in 1980 dollars.
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