Gold was worth more in 1980

The resistance seems firmly in place

https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F3df7da52-7786-4cda-b208-1ea83bf8e9cd_600x301.jpeg
The Grant Wood commemorative US 1 oz gold medallion from 1980, for sale on auction platforms like eBay.

On August 6, 2020, gold struck a “record” value of $2,069.30 an ounce. It was a record in nominal terms only, though. Adjusted for inflation, that price doesn’t eclipse gold’s 1980 peak of $2,073.90/oz in today’s dollars.¹ Close, but no proverbial cigar.

That an ounce of gold from 1980 would get you a little further than an ounce purchased today is not the most important piece of information to be conveyed here. Rather, it’s that the shiny yellow stuff appears to meet resistance at roughly these levels, or somewhere close to $2,100/oz (in 2020 dollars), before retreating for long periods of time. Simply put, there seems to be an invisible ceiling capping its price action, and rebuffing those who seek further gains.

It was in 2011 that gold set a real record at $2,091.07/oz (in 2020 dollars), some 31 years following the 1980 peak. Thereafter, it again retreated. Note that this valuation is eerily inline with the one from 1980, and, when combined with its summit to $2,069.30 this past August, reinforces the notion of an unspoken but nonetheless active limit on its upside potential.

This lies in stark contrast to investor heavyweights out there calling for $3,000+/oz. Jan Van Eck, of VanEck family fortune and fund fame, believes the base case for gold moving forward is $3,400/oz. You may recall that VanEck funds include such investment vehicles as GDX and GDXJ.

Meanwhile, Bank of America back in April of this year raised its 18 month price target to $3,000/oz.

The reasoning given is often rather loose (if there is any provided at all). Usually, it relies on what are by now considered to be self-evident truths of owning the precious metal: It’s a hedge against turbulent times/uncertainty/monetary expansion/fill in the blank.

In actuality, however, there are major reasons to avoid owning gold altogether.

  • It’s a highly psycho-emotional asset.

  • There’s no historical evidence that it hedges well against any risk.

  • It has very little practical use.²

What’s more, it bears repeating that each time after reaching these absolute price peaks mentioned above, gold prices have declined precipitously.

In spite of decades of separation, and though they occurred during different eras of this country’s history, gold’s summits have been remarkably consistent in terms of inflation adjusted dollars. Now, for the third time, gold very recently neared that exact same level. Just a few dollars more this past August and it would have regained its former glory from roughly 10 and 40 years ago, making the presumably arbitrary look anything but.

In that case, it becomes all the more difficult to believe that gold has a $3k/oz future in store — or that it is due to rise more from here by any amount at all, really — as opposed to ultimately plummeting yet again. Indeed, it has already receded from its latest high. This, in addition to countless other issues with gold as an investment, make it something of a heartbreaker.

Could it ultimately rise to $3k/oz and more? Sure, but the why is unclear.³ Otherwise, at last check, one still couldn’t eat gold, it has no intrinsic value, it certainly won’t cure you of COVID-19 or help you purchase household goods, and it won’t hedge inflation the way they say it will (unlike equities).

So what is the evidence-based rationale for it, again?


Footnotes

¹ CPI Inflation Calculator. US Bureau of Labor Statistics. Nominal price per ounce of gold data retrieved from the “Gold” page at TradingEconomics.com.

² Valenta, Philip, MSF. “Three Reasons to Avoid Gold.” Intersectionist (2020).

³ For instance, it may hedge the irrational, temporarily bringing investors psychological peace of mind in times of great distress. However, people may ultimately adjust, even to what at first strikes them as irrational, and the need for such an asset may dissipate.