Gold Is Still 33% Below its Inflation Adjusted 1980 Peak

By: Gold_Investments

Gold
Gold traded sideways yesterday and spot gold ended the trading day in New York up 10 cents to $731.10.

In overnight trading in Asia and Europe gold has sold off and is down some 1% to $727.50/728.00 per ounce as of 1200 GMT.

The BHP rumour of a huge new gold find which in fact is not a new discovery rather an upgrade is not likely the cause of the sell off. Even if BHP or another mining company was to find a very large discovery of gold it would likely take some 7 to 10 years to extract the gold and bring it to market.

Gold's weakness is likely due to a much signalled bout of profit taking and consolidation after the significant run up in the last 5 weeks (from the recent lows at $650 on August 16th). Also there was a tentative recovery in the USD. Often stocks and commodities give up up to 50% of a sharp price increase and this would lead to a drop of some $40 from the high to around $690. The $690 to $700 level was strong resistance prior to the break out and thus may be expected to provide support to any correction.

Gold has option expiry on the Comex today and this may result in a forced sell off by larger players. There is large open interest in the October $710 and $730 (some 12,278 contracts). However, the paper players will likely be met by strong physical demand below $720 per ounce.

Given the extremely strong fundamentals we expect any correction and consolidation to be short and shallow prior to gold rallying into its coming strong season and a possible challenge of the psychological $800 before year end.

Gold is Some 33% Below 1980 High Adjusted for Inflation
For those worried that gold is near record 27 year highs and thus gold's best days may have passed it is important to realise that gold remains very undervalued especially when one looks at gold historically and when one adjusts for the huge inflation of the last 27 years. The following long term adjusted for inflation gold chart (1970-2007) from Zeal LLC puts it into perspective.

The important reality as noted by Adam Hamilton (http://www.marketoracle.co.uk/Article2212.html) is that "gold in constant 2007 dollars spent the better part of five years over $750 in the early 1980s. In order to get anywhere close to hitting an all-time real high today, gold would have to rocket to nearly $2300 per ounce. This, more than anything, puts today's gold levels in proper perspective. Gold may be high in nominal terms today, but it remains quite low relative to where its last secular bull gave up the ghost. . . .

Only time will tell of course, but today's gold bull still looks relatively young. Real gold prices remain quite low compared to historical highs and gold is still largely ignored by mainstream investors. Most of the general public still doesn't even seem to know it exists. While gold will correct from time to time, a multi-year slump like the mid-1970s seems unlikely. And while gold will eventually go parabolic, it should be some years later in this gold bull after Stage Two fully runs its course. . . .

The bottom line is gold remains nowhere close to its last secular bull's real highs of early 1980. Despite what the financial media claims, it is just plain silly to compare nominal prices across decades. Once you adjust the gold price by the most lowballed and conservative estimate of inflation, $725 gold is just one third of the way to the $2300 Stage-Three mania highs witnessed in January 1980. . . . .

$725+ gold is really not that big of deal historically and there is no doubt that it is quite sustainable."

Forex and Gold
There were no economic reports released Monday, acting as the calm before a storm of economic reports scheduled for later in the week. Tuesday, a pair of economic reports should provide insight into the health of the economy.

At 10:00 am ET, a report on consumer confidence from September will give investors information on how the consumer sector of the economy has reacted to recent turmoil in the markets. Analysts expect a slight decrease from August, down to 104.5. The consumer confidence index in August plunged to 105, the largest drop in the two years since Hurricane Katrina.

Also at 10:00 am ET a report on existing home sales for August will be unveiled. Analysts expect no help in the shaky housing markets, predicting further decreases in sales to 5.5 million. In July sales were reported to be 5.75 million.

Later in the week investors can look for reports on durable goods orders, GDP, new home sales, and personal income and spending all of which will likely show continuing and maybe even a deterioration in the health of the U.S. economy.

Silver
Spot silver was trading at $13.37/13.39 (1200 GMT).

PGMs
Platinum was trading at $1336/1342 (1200 GMT).
Spot palladium was trading at $338/344 an ounce (1200 GMT).

Oil
Oil prices eased again Tuesday but remain near record highs above $80 per barrel.

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