About seven months ago I posted a story about the price of gold going up to $5,000+ per ounce. Since then there have been some ups and downs but the price has indeed continued to climb. Today the New York Times carries a Reuters Breaking Views commentary agreeing that we could very well be on the way to $5,000+/oz.:
It sounds like a gold bug’s dream. But looking back to the last inflation-adjusted peak price in 1980, it’s far from impossible that the gold price could soon go above $5,000 an ounce.
The potential level of a new high can be estimated in several ways. Based on consumer price inflation, the peak of $875 an ounce in 1980 is equivalent to about $2,300 today, almost twice the current gold price. But there’s a case for taking account of economic expansion as well as price inflation. The world’s economic output has increased about sixfold since 1980. Scale up the peak 30 years ago by that multiple, and the gold price could top out at around $5,300.
Gold can also be regarded as an alternative to money. Broad global money supply, known as M3, is now in dollar terms about 10 times what it was in 1980. The total gold supply has also increased to some 170,000 metric tons, from 110,000 tons over the same period, as more has been mined. Scaling up by money supply and deflating by the gold supply, the 1980 peak price would be equivalent to about $5,700 an ounce today.
Looking at money supply another way, today’s potential gold price would be a bit lower than that. A narrower measure of global money, M1, is currently estimated at about $17 trillion. If the 170,000 tons of gold mined through history were to substitute for this, the gold would be worth about $3,100 an ounce. But that wouldn’t account for the tendency of the thinly traded gold market to overshoot sometimes to the upside, as it did in 1980, and sometimes to the downside…
[continues in the New York Times]