Gold at $2,000 Becomes Inflation-Adjusted Bulls-Eye for '80 High

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"Bullion hasn't kept pace with the cost of bread, fuel or medical care."

Gold's rally to a record means prices are still 53% below the 1980 inflation-adjusted peak.

While gold rose 19% this year to $1,072/oz. on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal's value. Bullion hasn't kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record $873 an ounce. In today's dollars, that would be $2,287, according to the U.S. Labor Department's inflation calculator.

Record government debt and interest rates close to 0% are pushing gold higher for a 9th straight year. When prices reached all-time highs, the contract with the most open interest was the December call to buy the metal at $1,200. The contract to purchase at $1,500 an ounce was the third biggest.

"The world's money supply has increased and gold hasn't kept pace," said Martin Murenbeeld, chief economist at DundeeWealth Inc. "We're now in a period where gold is catching up."

Banks have raised their gold estimates. On Oct. 9, JPMorgan Chase & Co. said the metal will average $1,006/oz. next year, versus an earlier projection of $950. Deutsche Bank AG forecast an average of $1,150, up 32% from its July estimate. Barclays Capital said "prospects for a run at $1,500 should not be underestimated" next year.

Gold would need to rise more than sixfold to top the 1980 record, using a more accurate inflation-adjustment, said John Williams, economist and editor of Shadowstats. He said the government has understated the cost of living over the past two decades with adjustments in the way it measures the basket of goods and services monitored by the U.S. CPI.

"If the methodologies of measuring inflation in 1980 had been kept intact, gold would have to hit $7,150 to be the equivalent of the 1980 record," Williams said.

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