Sunday, February 14, 2010

Long Term Perspective on Gold

Here are charts of gold, platinum and palladium (the "poor man's) platinum from 1960 or 1968 to the late 1990s.
All have increased in price roughly 10 times since 1976.
This is a 7.0% compound rate.
Gold was $20 per ounce 100 years ago. That is a 4.1% compound growth rate. Of course, there was as much deflation as inflation until FDR, about 75 years ago.
In the last 70 years, gold has increased 5.0% per year in price.
Thus the rate of price increase of gold and other precious and semi-precious metals has accelerated.
These prices have increased over the long term faster than agricultural prices. This likely reflects the depletion of higher-grade ores that are easier to mine, along with environmental restrictions. In the case of platinum and palladium, increased use in catalytic converters in the auto industry has increased the market lately.
If governments continue to pursue strategies of bailing out failing companies, especially financial gambling companies, by issuing more debt rather than a more straightforward strategy of paying down debts, why should we not assume that a body in motion will stay in motion, and that the acceleration upward of gold prices will continue until they either get so high that they fall of their own weight (NASDAQ 2000) and/or concerted effort topples them (Volckerism)?
For a technical update on gold, please consider Trader's Narrative recent posts, both the linked-to one and the one immediately below it. I take that analysis as generally bullish, especially considering that the blogger focused on the downside risks to gold rather than the high upside price targets one would get from joining the successively higher price spikes together, and also considering that the latter (earlier) post disses a writer named Ken Kurson as being a perfect contrarian indicator. I have reviewed the evidence presented for that and strongly disagree. The examples cited look as though he has a fine enough track record. So, overall, I consider gold to be reasonably valued relative to the financial alternatives but with the same sort of bullishly-configured chart that the NAZ had in the 1990s.
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