The other day I was talking to someone who had bought gold when it was priced at NZ$1800 and at the moment costs over NZ$2800. He has got some extra cash and the problem is he thinks that the current price of gold is too expensive. The issue here is a psychological phenomenon called anchoring. When you become anchored to a certain price, then any higher price seems expensive. Is gold and silver cheap at the moment? There are lots of ways of looking at this, one aspect of which is inflation adjusted prices.

What price charts don’t account for

It is important to remember that price charts are only general representations, they don’t tell us the whole story.  For example they don’t account for the following factors:

  • Trading fees
  • Ongoing expenses
  • Dividends/income
  • Taxes
  • Leverage

Trading fees may include fees for buying and selling stocks, lawyers fees for property transactions, or currency exchange fees. Some types of investments have ongoing costs such as mutual fund management fees, storage fees for gold, mortgage interest or property maintenance and property management fees. The effects of dividends and income are also not reflected in the price charts. Taxes such as property taxes or capital gains taxes reduce the gains shown on charts. The use of leverage has the effect of either magnifying the nominal return or magnifying the nominal loss.

Stock market, gold, and real estate returns

NASDAQ (blue), DJI (orange), and SPX (green) over 46 years (indexed to 100)

Let’s start by looking at stock market returns over the last 46 years and the chart has been indexed to 100 so we can compare them. The blue line shows the NASDAQ and which has consistently outperformed the Dow Jones index and S&P500 which are shown in orange and green respectively. There is absolutely no denying that technology stocks have been the place to be for the last few decades. Remember these are USA indices and in fact indices around the world haven’t fared quite so well. For example in the UK the stock index is currently at roughly the same level as it was in 1998 and the Australian stock index is at the same level that it was in 2006.

Nominal returns for NASDAQ, gold, and real estate (indexed to 100 in 1971)(Source: FRED)

The above chart shows the indexed nominal returns for NASDAQ, gold, and real estate All of these assets beat the consumer price index (CPI) and of course the NASDAQ had the best performance, followed by gold, followed by the DOW and S&P500 (calculated manually, not shown on chart). The lower performance was actually real estate (but remember, unlike with gold, the majority of real estate investors use leverage.)

Inflation adjusted returns for NASDAQ, gold, and real estate (indexed to 100 in 1971)(Source: FRED)

What happens if we adjust the returns in terms of purchasing power of the US dollar? The above chart shows that gold is actually the only asset that is cheaper than it was in 1980. Everything else has consistently and steadily appreciated in price. Note that this chart uses the official government CPI values. We previously suggested that the true rate of inflation is higher than the official CPI would suggest, partly due to changes in the way CPI is defined.


Cumulative consumer price index (CPI) using official, Chapwood, and Shadow stats methods (Source: govbanknotes)

Some might say “what does a few percent here or there matter?”. It matters a lot due to the power of compounding. When it comes to investing, compounding is one of the wonders of the world. However, when it comes to inflation, compounding is a nightmare. The chart above shows the cumulative CPI when measure using the official, Chapwood, and Shadow stats methods. The lowest value is the official CPI method. Discrepancies do compound over time, hence the increasing and sizable gap between these values over time. The divergences start to occur in the early to mid 1980s. It is up to you to decide which of these you believe to be the correct level of inflation based on your experiences. This data suggests that in the 1970s and 1980s, the official CPI was actually close to the reality whereas there is a suggestion that there is currently a large divergence between the real inflation rate and the officially quoted CPI.

Inflation adjusted gold price

Nominal and inflation adjusted gold prices using 2011 US dollars (Source: Bud Conrad)

The above chart shows the nominal price of gold in blue, and the red line shows the inflation adjusted price using the official CPI figures. The green line shows the gold price adjusted using the Shadow stats value for CPI based on the 1980 method. Overall it really depends how much inflation you believe there really is. If you believe that there is no inflation at all, then the blue line is the correct line and indeed gold could be seen as being the most expensive that it has ever been. However if you believe that inflation is greater than the official figures, then gold is relatively cheap compared to previous years. Note that this chart is based on 2011 US dollars and so the value of that peak in 1980 was $7,000. That value will vary depending on which year US dollar value you are using.

Inflation adjusted gold price using 2018 US dollars (Source: GoldSilver)

The above chart shows the shadow stats inflation adjusted gold price using 2018 US dollars. Instead of $7,000, the 1980s peak has increased to over $12,000. This chart suggests that when we compare like for like gold is actually cheaper than it was in 1980. 

Annual inflation in USA (Source: FRED)

Of course conditions were very different in the 1970s and 1980s. At that time inflation was actually quite high. The chart above shows that the annual inflation rate in 1980 reached over 13%. Also at that time, the official CPI was probably closer to reality than it is now. At that time, faith in the US dollar was shaken. However currently the general public do seem to have full faith in the US dollar and perhaps part of the reason for that might be because the officially quoted CPI is low, possibly providing a full sense of security. The shadow stats figures suggest that the current annual inflation rate is closer to about 8%. Perhaps if inflation does become more obvious to the general population, then gold price will move closer to the levels observed in the 1970s levels. If the inflation rate in reality were to exceed that 13% peak that we saw in 1980, then that tells us that gold has a lot higher to go. All of this hinges on what your expectations are with regard to inflation.

Inflation adjusted silver price

Inflation adjusted silver price (Source: Macrotrends)

Th inflation adjusted silver price is even more extreme than that of gold. In US dollar terms we are way below the 1980 peak which reached close to $120.

Inflation adjusted silver price using 2018 US dollars (Source: GoldSilver)

The situation is even more extreme if we use the shadow stats CPI which in 2018 US dollars shows that the peak silver price in 1980 was over $680


If you believe that inflation is going to become more obvious to the public, and that inflation rates can reach or exceed the 13% levels that occurred in the 1970s, then yes, gold and silver are very cheap right now.