Real Gold Highs?
Adam Hamilton
Archives
Jan 13, 2006
The Ancient Metal of Kings continued to dazzle this week, challenging $550. In honor of this awesome event, headlines in the financial press trumpeted gold's 25-year highs. While technically correct, indeed gold did last close over $550 a quarter century ago to the month in January 1981, the media's fixation on today's gold highs is quite misleading.
Prudent investors, and rightfully so, tend to be wary when they hear of prices trading near 25-year highs. The core tenet of successful investing is to buy low and sell high. So if an asset is trading at a quarter-century high-water mark then odds are its price is pretty darned high at the moment and therefore a bad buy, right?
If I was not a student of the markets and hadn't spent years studying gold, I know I would be reluctant to invest in anything near a 25-year high. Buying high is anathema to the whole contrarian investment philosophy of buying cheap and selling dear. But gold, believe it or not, is still a great contrarian investment even at today's quarter-century nominal highs.
How is this seemingly absurd thesis possible? The answer is the measuring stick for any investment pricing, the US dollar, has radically changed in the last several decades. A dollar today is worth vastly less than a dollar was 25 years ago, the last time gold closed over $550. Comparing nominal dollar prices of decades past with dollar prices of today is not valid, a horribly flawed apples-to-oranges kind of thing.
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