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How has the purchasing power of gold increased since 1900?

June 15, 2012, 12:00 PM Przemysław Radomski , CFA

Since the year 1900 the real purchasing power of the USD has eroded massively. It appears today to have lost 99% in its purchasing power. This is staggering if correct. Assuming it is true, has the corresponding real purchasing power of gold over this time increased by more than, less than, or equal to 99%?

To what extent has gold kept track with the fall in the real purchasing power of the USD? Of course gold also acts as a safe haven, making a perfect calculation is difficult. But the answer to this question is perhaps useful to better understand why gold has been behaving more like a risk asset of late.

Before 1971 gold was exchangeable for the USD so speaking of USD's purchasing power until that time is similar to speaking of gold's purchasing power. In order to compare the differences, we will focus on the move in both of them (purchasing power and gold) from 1971. The answer to your question will depend on what inflation numbers one decides to use. If we use the higher of the official numbers and the numbers (in which the way inflation was measured was not changed), we get cumulative inflation of approximately 1900% since 1971. So, if gold was fairly priced at $35 back then, it should be fairly priced at about $700 right now. Therefore, gold is not oversold relative to its inflation-adjusted 1971 price.

The question is if gold was fairly priced back then - gold moved higher right after it was allowed to float and it topped far above the "fair" $35. The inflation-adjusted 1980 high would be over $8,000 in today's dollars if we use inflation numbers.

Consequently, gold is within the trading range that is reasonable relative to the inflation-adjusted prices from the previous bull market. The trading range ($700 - $8000) by itself does not imply a move in either direction in our view.

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