After appreciating that to invest in gold is to preserve one’s capital and purchasing power before chasing any potential capital appreciation, investors need to understand another critical issue within gold investment.
Investors often ask if the fact that the gold price has risen by over 6 times since 2000 means that this gold bull market cannot go much further. The short answer is no, but to understand this means understanding the different between judging gold investment simply by the gold price, or by the actual value of gold.
Gold price versus the value of gold
There is a great difference in investment between price and value.
To worry that now is a bad time or too late to buy gold just because the gold price has done so well since 2000 is to misunderstand gold.
The accusations of gold being in a bubble tend to focus on the fact that the gold price has soared, but forgetting the reasons that sent it higher are still in evidence.
Demand for gold investment increased at the beginning of this millennium because investors perceived gold to be undervalued relative to the integrity of the monetary and financial systems. The gold price was around $250/ounce, and some thought this undervalued the metal of kings against the contemporary fiat money system.
There were a few far sighted investors calling the start of this bull market at the turn of the millennium, and they vary in how they decide that gold is undervalued or not.
How to value gold?
Gold is money, and has been for around 6000 years, and gold investors tend to balance the price of gold against previous inflation adjusted gold prices and against the alternative monetary system that we currently have. This modern purely fiat system has only existed since August 1971 when President Nixon closed the gold window.
For the sake of brevity we will use US dollar examples, which is not bad thing considering that America continues to manage (mismanage?) the reserve currency of the world.
Let’s start with a look at the inflation-adjusted gold price over recent decades. We need to remember that to do this we have to rely on inflation statistics, which are a political tool. Government statistics of inflation often underreport that extent of price rises. We should not be surprised about this,…
