pwillow has raised an important issue that has me troubled as...

pwillow has raised an important issue that has me troubled as well, and of course ctindale has made a lot of comments on the issue of gold's relative price.

I am not sure if I am adding a lot but here goes.

Firstly there is a major issue about the accuracy of the inflation measurement. This has been taken up at http://www.shadowstats.com/alternate_data by John Williams' Shadow Statistics which estimates a significantly higher level of inflation than what the government has admitted. Basically components making up the CPI have been altered several times to reduce the CPI figures.

Hence if John Williams is right that real inflation was higher, this would mean that today's CPI adjusted gold price would be more than the $USD1030 proposed by pwillow.

The second matter that needs to be considered is that money printing is now going on in a big way in all major economies (China, USA, Japan, Europe, UK) so gold should appreciate against all currencies, not just the USD.

This is what David Rosenberg (a "deflationist" economist) wrote on 27 October 2009 in his newsletter https://ems.gluskinsheff.net/index.ncl.html
"WHAT IT IS ABOUT GOLD?
After all, you can’t calculate a P/E. There is no dividend discount model. There is no interest rate or income stream. No — gold is a store of value and one that has been durable and reliable for thousands of years. No fiat currency system has outlived gold. The question is what is so sacred about fiat paper money? A backing of the government printing press, is that the alluring factor? The Fed has been pumping money into the system at an unprecedented fashion and even if it is sitting idle on commercial bank balance sheets as excess reserves, that money is still in the system.
So what about gold? How much of that is in the system? How about the fact that global gold production, after doubling from 1980 to 1999, has completely stagnated over the past decade? Has fiat currency done that? And, how long does it normally take for a gold mine to yield production? Answer -- five years or so? Do you think it takes Bernanke et al that long to print greenbacks? At least we know with some degree of confidence about the supply of gold; there are reserves equivalent to about 40% of the total amount of gold above the ground (and half of that is in South Africa).
As we said, it takes time, usually five years, and plenty of financial resources to bring gold mines into production. In this sense the supply side of the gold equation is relatively constant — in economic parlance. Fiat government-issued currency is not — especially in the context of a U.S. monetary and fiscal authority that will stop at nothing to revive a cycle of overspending and over borrowing.
In the current sense, the pullback in consumer spending is being replaced either by government spending or incentives to prevent households from modifying their spending behaviour away from frugality; and the pullback in credit demand by the consumer sector is being offset by the Fed’s involvement in the mortgage market to ensure that borrowing costs remain very low, and by the FHA to ensure that down-payment requirements are as close to zero as possible. The supply of gold is reasonably easy to figure out — the supply of fiat currency is less easy to figure out. The behaviour of not just the U.S. government but governments everywhere seems to be that reflationary policies will ultimately be the key towards redressing the ongoing private sector deleveraging cycle.
Back to the gold market. There is an estimated 120,000-140,000 tons of gold above ground. That would equate to roughly $4 trillion. The total amount of U.S. dollars in circulation globally is estimated at $8 trillion, and the total size of the global money supply would thereby be closer to $30 trillion. The size of the world stock market is around $40 trillion. At last count, the total size of the global bond market was north of $80 trillion. The total world derivatives market has been estimated at about $800 trillion, face or nominal value. Hopefully all this places the total value of gold above ground into a certain perspective.
So, here is what makes gold so attractive, beyond the fact that it is a hedge against irresponsible fiscal, monetary policies and reckless trade policies, is that relative to fiat currency, bonds and equities, it is scarce. We can also get into geopolitical uncertainties and reckless trade policies, but they are just the proverbial cherry on the ice cream.
Scarcity. That is the answer to the question “why gold?” End of story. Just to back the amount of currency that is out there right now, gold has the potential to triple from here, never mind merely double. Sounds outlandish, to be sure, but when gold was carving out its bottom at $255/oz in September 1999 (when the S&P 500 was flirting near 1,300 — sorry to have to add that one in), was anyone calling for it to rise four-fold in the next decade? Secular bull markets usually last 16 to 18 years and this one is just in year 10, so let’s say that we are barely past the halfway point in both duration and magnitude in this gold cycle."


A third matter to take into consideration is that since 1980 world population has gone up by perhaps 50% and incomes in many countries are much higher (BRIC, SE Asia, Arabs) so the potential demand is also much greater. The impact on price from that has been partially offset by the gold that has been mined since then.

Finally I have to agree that if people want more gold then they will have to pay more for it because average grades have fallen while costs have risen. There is a peak gold argument, and some suggest that the industry needs a higher gold price.

My gut view is that as long as governments keep printing lots of money beyond the normal growth of their economies the price of gold will keep rising faster. This view is supported by some very successful hedge fund managers (eg John Paulson).

I am not sure if this adds much to pwillow's comments.

loki