The Ultimate Guide to Gold Investments: Is Gold’s Upside Capped?
When it comes to calculating the purchasing power of money, the Consumer Price Index () has its flaws. But what if we told you there’s a way to gauge the true value of gold by looking at its inflation-adjusted (‘real’) price? By dividing the nominal US$ price by the US CPI, we can see that the real gold price has peaked at the same level multiple times over the past 50 years, with the current value hovering around this level. Could this mean that gold’s potential for growth is limited?
Several factors point to a cautious approach to gold in the short term. From the high speculator net-long position in gold futures to cyclical turning points in the gold mining sector, there are signs that the road ahead may not be smooth. The looming possibility of reduced US federal government spending post the November 2024 election also adds to the uncertainty. Despite these challenges, we anticipate that the gold/CPI ratio will reach new highs within the next year due to various reasons:
1) The impending US recession, long delayed by government stimulus efforts, will finally take hold.
2) Both major US political parties show little concern for the country’s growing debt, signaling a lack of political will to cut government spending.
3) Our method of adjusting for inflation suggests that the current ‘real’ gold price is far below its peak levels in 1980 and 2011.
While the gold/CPI ratio may currently be flirting with resistance levels, this barrier is unlikely to hold up for much longer. Our analysis indicates that the potential for gold to soar in the coming months is significant, despite the short-term risks.
In summary, understanding the dynamics between gold prices, inflation, and government policies is crucial for making informed investment decisions. By staying informed and analyzing the long-term trends, investors can position themselves to benefit from the potential growth in the gold market.