– Contributing Editor Doug Hornig

Jeff’s good friend Doug points out the significance of gold’s new all-time high price, one you may not have caught. He also shares the price he first bought his first few ounces of gold…

In my previous article, I posed the question as to whether it was too late to buy gold. That was back on April Fool’s Day. Gold was then sitting at $3125/oz., an all-time high in nominal terms. As I write now, on the 21^st, the price is $3410/oz.

And that’s significant.

Not because it’s risen over 9% in less than three weeks, or has made numerous all-time highs this year, although that’s pretty remarkable. It’s because…

• Gold has blown past its all-time price high in inflation-adjusted terms (IAP). For the first time.

To fully appreciate what that means requires a quick dip into history.

Valuing Gold

91 years ago, gold was a monetary metal, meaning that it was money used in everyday trade. Paper dollars were gold-backed. Anyone could walk into a bank and swap them for gold, at a price fixed by the federal government, $19.75/oz.

Then Franklin Roosevelt happened. The economy was in the early throes of what would become the Great Depression, and FDR was overwhelmingly elected to “fix it,” winning 472 electoral votes to the incumbent Herbert Hoover’s 59.   The best path forward was murky, but FDR believed that the way out was to make the government the employer of last resort. Washington would give people jobs.

Problem was, these programs were costly, and the gold-backed currency was a constraint on spending; the government didn’t have the cash to pay for them. He had to somehow increase the money supply.

What to do? FDR’s solution was to create inflation by devaluing the dollar. As a first step, he issued Executive Order 6102 in 1933. It outlawed the private ownership of gold by American citizens and mandated that they exchange whatever they were holding for paper currency.

It may be hard to imagine, today, that anyone would have complied. Many didn’t. With gold no longer circulating in commerce, there were a lot of backyard burials. However, trust in government was far higher in the 1930s, and if this order meant an easing of the Depression, most were all for it.

FDR followed up by re-valuing gold, in 1934, to $35/oz. Voilà, instant inflation. Those who had turned in their gold saw the paper dollars they received suffer an instant loss of 77% in their buying power. But FDR could expand the money supply by the same amount, and the New Deal was made possible.

It’s likely that much of the population, ignorant of monetary policy, didn’t even know they’d been had.

The nominal price of gold stayed at $35 for more than three decades. It survived the Great Depression and wasn’t even changed in the face of a world war that demanded an enormous outlay of money.

During that period, foreign creditors continued to have access to American gold in the settlement of debts. By the 1960s, foreign demand for gold skyrocketed as faith in the soundness of the dollar declined. In response, President Nixon ended the international trade in dollars for gold in 1971.

In 1973, gold was re-valued to $42.22/oz. That wouldn’t hold for long. In December 1974, President Ford signed a bill that would “permit United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad.”

Free Market

The floodgates were opened, and all the upward pressure that had been building behind the gold price was released.

It took a while for the public to realize their new freedom. The gold price moved slowly higher for a few years before finally exploding. Up 50% in 1978. Doubling the year after that. And finally cresting at $850/oz. on January 21, 1980.

That’s our reference point, the nominal high that would become the all-time IAP. From there, gold went into a brutal, 20-year bear market that saw it bottom out at $250 in 1999 (an IAP of $480, or 56% less than it had been worth in 1980). Tough sledding, for sure.

But one man’s loss can be another’s gain, and personally, I got lucky. Now I claim no more ability to peer into the future than anyone else. And at the time I was completely unfamiliar with the history of gold as money. Yet even if I couldn’t put a finger on it, something told me that gold was dirt cheap. Especially compared with the stock market, which had soared to dizzying heights in the NASDAQ bubble.

• So in 1999 I tapped my very modest savings to buy three 1-oz. Australian Kangaroos, for $282 each.

I took delivery and held my first gold in my hands.

Little did I know that I was fortunate enough to blindly stumble into the trade at the beginning of a bull market that has run for a quarter-century, and counting. Gold, which had been shunned for two long decades, suddenly regained the store-of-value status it had held for over two and a half millennia. And holds still.

Gold’s Real Function

I’m a believer. I purchased my last 1-oz. coin—hoping I have enough—for $1238 in 2015. I’ve never sold an ounce since and never will, short of a real financial emergency. Because I’ve come to understand what gold actually is:

• An insurance policy against the depredations of a government that cares nothing for the ravages that inflation inflicts on its citizens.

Sure, I think that everyone who owns physical gold casually follows the changes in its price. It’s been a somewhat wild ride that was capped, as mentioned at the beginning, by shooting past its IAP, $3,291.50/oz., in mid-April. That’s the inflation-adjusted equivalent of $850 in January 1980. (Or, looked at properly, gold has held rock steady while inflation devoured 75% of the dollar’s value.)

It’s fun to watch the gold price over time. It’s fun for me to calculate the present worth of my holdings, and the gain I’ve theoretically realized (a 1200% increase, in nominal terms, on those 3 Kangaroos).

Thus it’s been pleasant to see gold’s IAP finally exceed its former high. That’s a milestone. It was a long time coming, but does it turn me into a seller? Not a chance.

The future, as always, is unknowable. Gold will surely have its ups and downs. But as the past 45 years have demonstrated, the metal’s price will always return to parity with its buying power.

That’s good enough for me, and why I wrote on April Fool’s Day that it’s never too late to buy and hold gold.

And for those that want the potential to really juice their gains, the timing couldn’t be better for mining stocks. Some have started to move in a big way, but many are still on the launchpad, including new opportunities we come across. See what Jeff is personally buying, the mining stocks he considers to be strong early stage or off-the-radar speculations.

Courtesy of the Gold Advisor