What Would $2000 Gold Be Worth?

Today, one of our readers (Jim) made a great comment worthy of further comment.  Jim said, "I'm not sure why you don't want to accept that gold is at a record high."

Let's imagine, Jim, that we are still on the gold standard and that gold is the money of commerce.  Would an ounce of gold today buy more than it would have in 1980?  

Let's refer to the example I made earlier.  In 1980, 10 ounces of gold would have bought a new luxury mid-size car carrying a price tag of $8,000 or so.  Today, you cannot buy a new luxury mid-size car for 10 ounces of gold, which when translated to dollars amounts to $12,500.  Even a Mini-Cooper carries a price tag of $20,000 for the basic car to $30,000 for the luxury version.  

Let's compare to another commodity.  A gallon of gas in 1980 was $1.25, an ounce of gold would have paid for 680 gallons.  Today at $3.00 per gallon, an ounce of gold would only buy 416 gallons.  

Now let's compare to income.  In 1980 the median income in this country was $17,710 per year.  In January 2010 after taking a monster hit since the credit crisis, that amount is still $46,026.  Or, in gold terms 20 ounces in 1980 against 37 ounces gold today.

Now let's work the numbers backwards.  To once again buy a luxury mid-size car with 10 ounces gold, gold would have to be $2500 to $3000 per ounce.  

To buy 680 gallons of gas, gold would have to be $2040 an ounce.  And, finally, in order for 20 ounces of gold to once again be worth a year's wage, gold would have to be worth $2,301 per ounce.

So, I say, in order for gold to match its record high of $1980, gold would have to reach these levels when deonominated in dollars to just to make the claim that gold is once again at record highs.  

I think it's a very important point to make precisely because all we hear is that gold is at record highs well above its previous record and that it cannot keep rising.    

We will get into more discussions on this but for now, let's settle on this fact.  Gold is not really an investment at all.  Since the early days of man and commerce, gold was a constant store of wealth.  It's not gold that fluctuates up and down in value, it is the currency against which gold is measured that fluctuates.  

People look at gold as being measured in dollars.  I look at dollars as being measured in gold.  And right now gold has a long way to go to reach its own record worth.

As inflation drives down the value of the dollar which in turn drives the cost of goods and services higher in dollar terms, gold will effectively maintain a constant value over long periods of time.  Right now gold is behind  the constant value curve and in my opinion needs to play a little catch up to say it has reached a record value.  

I believe this is the global perspective that is still driving gold demand at record levels.  If you want to stay ahead of the curve, follow the example the smart money is setting and grab a few gold coins to put in your retirement accounts.