Is gold overvalued? Taking into consideration its historic pricing in inflation-adjusted dollars, gold is actually nowhere near its previous highs. At its inflation-adjusted peak in 1980, gold was trading at about $850/ounce. Based on today’s prices, one would assume that gold is trading at multiples over its historic highs. In reality, gold would have to reach almost $2,420/ounce to match its inflation-adjusted 1980 high.
With such widespread uncertainty in the world economy and a deepening concern over the stability of the world’s major currencies, investors are turning to gold as a safe haven. As a result, gold's prices have skyrocketed. That being said, is there really any reason for investors to feel any better about the world markets and economy? In fact, the current pullback is likely no more than a brief respite before the next shoe drops on the economic news front.
Since President Nixon removed the US Dollar (USD) from the gold standard in 1971, our currency has been manipulated by the Federal Reserve to the point of near worthlessness. Over the 24 months proceeding September 2011, the USD lost as much as 31% against the currencies of Japan, Switzerland, Australia and Canada, and lost more than 20% to the much maligned Euro in the last 18 months alone. There's no realistic reason to believe this devaluing isn't going to continue.
With the USD and other major currencies in a tailspin, investors are turning to gold as a trusted store of value and the increased demand has driven its prices northward.
So, will gold's trend continue? Adjusted for inflation, it would appear there is more room for growth. Any significant trend downward would depend largely on the world’s economic powers exercising good stewardship. Given their track record, I’d bet on gold!