In early June, Fed Chairman Ben Bernanke announced the policy to buy $85 billion each month in bonds would soon begin "tapering" which caused the price of gold to drop dramatically. However, price declines similar to this are nothing new and many still expect gold to maintain its purchasing power against the dollar.
Alpha Stars
Jul 18 2013, 09:06
Seeking Alpha
For a moment I wondered if gold would turn to copper. Or rust.
In early June, gold was trading around $1415 an ounce. Then, the newly released U.S. employment report beat analyst expectations. And, the Federal Reserve announced its policy to buy $85 billion each month in bonds to hold down interest rates. In response, gold fell as low as $1192 an ounce, the lowest since August 2010.
But, there is a silver lining to gold's price movement.
Price declines are nothing new
In a previous post, I described how gold maintains its purchasing power against the dollar. I expect the trend to continue. Here's why.
According to the government census page on historical house prices [pdf], the median house price in 1975 was roughly $40,000. Using gold's historical values, gold was valued at $200 per ounce in 1975. About 200 ounces of gold would be necessary to purchase the house. Right before the 2008 downturn, the median housing price was $240,000-a six-fold increase in price for what is presumably the same house. At only $1000 an ounce, almost the same amount of gold would buy the same house.
Note the two major peaks since since the gold standard was plucked away in 1975.
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