As the Fed continues down the path of stimulus, discussion over hyperinflation intensifies. Today one of my favorite analysts, Eric Bolen of Fox News and Fox Business networks, did a piece on inflation. He says food staples such as rice and bread are headed much higher. He also warned of $7 per gallon gas. Depending on the rate at which these prices rise, that could constitute hyperinflation.
Invariably, as the topic of hyperinflation is broached, the subject of gold enters the picture. It's widely accepted that inflation affects the gold price. A recent article by Egon von Greyerz, of Matterhorn Capital Management, tells us hyperinflation could drive gold to unthinkable heights.
One common reference to inflation and gold is that when adjusted for inflation today, gold would have to reach levels higher than $2400 an ounce to equal its 1980 high of $850 an ounce. That's 65% higher than where the gold price is now. This suggests gold may be undervalued.
Let's look at another inflation measure like the price of gas. 30 years ago a gallon of gas was about a dollar. Today it's three times that and by some reports could be four or five times that by summer. This suggests a target gold price over $4,000 an ounce.
And, if anything tells the inflation story it's government spending. In 1980 it cost $600 billion to run our country. Now it costs $3.6 trillion, six times more than it did 30 years ago. This brings $5000 an ounce gold into view.
Then consider the effect inflation has had on our national debt. A case could be made today, for gold well above $10,000 an ounce. To some this borders on the unthinkable, but numbers don't lie. In 1980 our national debt was $900 billion, give or take a hundred million here or there. Today, it's $14 trillion, if you don't count another $40 trillion or so of unfunded liabilities, pension obligations, Fannie and Freddie debt and whatever else we choose to pretend no longer exists.
If the rise in gold price today, mirrored the inflation induced rise in our real national debt, now we arrive at an unthinkable number. But here's the point. These are cases we can make for gold, now, based on normal inflation and its comparative effect on other commodities, budgets and debt.
If we get hyperinflation, brought on by ongoing and massive stimulus, the gold price could truly rise to unthinkable heights. By any measure, the case for gold being undervalued at today's prices is very strong. It doesn't take much of an imagination to see why gold is still cheap as dirt.