Currently, there is a debate about the real value of gold. Some say, its real price should be over $2,000, while others say it should be around $800. Here is one side of the argument that defends the low prices of the yellow metal.
Gold is commonly realized as an inflation hedge in times of a financial crisis. Yet gold as an investment in the long-term it’s return is close to zero. Holder of gold from 1, 10, 15 and 20 year investment periods, haven’t seen the difference in the nominal and real returns of gold, as it wasn’t forced by a realized inflation. According to history the real price of gold is currently high. When the real price of gold was above average the successive real returns has been below average.
According to extensive beliefs, gold has a probable inflation hedging talent, this is considered for some investors as a benefit. Alternatively, traders commonly are seeking for the active markets to trade assets and make profits out of it.
President Roosevelt, in 1933, had forbidden private ownership of gold in the United States. In 1975, the United States citizens were able again to own and trade gold. Only at that time gold was at its real price with introducing the trading gold future contracts.
One of the methods to determine the real price of gold is the ratio of the nominal price relative to the CPI. The CPI (US Consumer Prices Index) value in Jan 1975 stood at 126.96.36.199; simultaneously the ratio of the nominal price of gold relative to the CPI index was 3.36.
Since the begging of future trading contracts, the real gold price ratio has average around 3.2. The ratio hit its highest value of 8.73, in January 1980. In March 2001, it reached the lowest value level of 1.46. On these calculations the real price of gold in March a year ago was 7.3. From the launch of gold futures this was the only former time gold price has been as high as was in 1980.
Till that period, gold price growth driven by inflation band and the actual price of gold has rarely remained the same. Bearing in mind the latest value of the CPI index, the real price of gold should currently be about $780 an ounce.
Such calculations, even as ugly as it seems to long-term investors and traders, become more feasible for most market members, those who do not find reasons any longer to put their assets in gold. Without inflation, holding a hedge against it appears unnecessary. Moreover, traders are observing less profit chances in a fitted range bound gold market.