Is Gold Overpriced? II

As a follow on to my earlier post, I should have noted that the gold standard was in effect in the US until 1971, with some breaks during the war periods and some odd happenings from WWI to Bretton Woods in 1946. However, the figure in the report I mentioned is not about the price of gold, but its purchasing power. For example, it may have cost an ounce of gold to buy a really good suit in 1880. If so, then it also cost an ounce of gold to buy a really good suit in 1950. That just seems weird to me, gold standard or no.

The purchasing power of gold started to deviate significantly from its historical range only after 1971, when the US currency was no longer pegged to gold. Perhaps the loss of confidence in the currency (and the hyperinflation of the 70s) led people to gold.

Following the end of the inflationary period in the early 80s, investor turned to the US dollar in times of financial crisis, as well as to gold.

With the US' increasing debt load, the luster seems to be off the US dollar as the currency of reserve, tipping the balance to gold (and the Canadian and Australian dollars.) These shifts can readily bee seen by examining the world gold council's graphs of the price of gold in various currencies. Since fall 2008, the price of gold is up 40% in USD, but pretty much flat in A$ and CDN$.

The price of gold (in USD) may go higher still, but it won't have anything to do with its historical purchasing power. It will have to do with a loss of confidence in the US dollar. Betting on confidence is a bit too speculative for me. I do own a bit of gold in the diversified part of my portfolio. If my investment in gold exceeds the proportion I've assigned to it, then I'll rebalance (i.e. sell).