Modest Inflation Points to $6,000 Gold

Below are charts comparing gold and silver to the CPI Index, specifically CPIAUCSL at FRED. I believe the CPI is reasonably accurate. Most inflation in the past 40 years flowed into financial assets with the exception of the 1998-2008 commodity bull market.

1. Gold vs CPI has an incredible basing pattern. The measured move out of this pattern is 15.5x the CPI Index. If inflation were approximately 4.1 percent annualized over the coming decade, gold would trade at $6,000 per ounce. The prior inflation spikes accompanied gold outperformance.

2. Assuming the CPI is reasonably correct, the charts indicate the gold/silver ratio will break out to a new range. This is my bias, but I believe gold will establish new ratios with most commodities. Gold will be remonetized over the next 20 years.

3. If CPI is understated, silver has been a terrible long-term investment if the goal was preserving purchasing power. Gold might also be a poor ultra long-term investment. The implication of high real inflation, and stubbornly lower precious metals, points to the Julian Simon argument being correct. Commodity prices are in long-term decline thanks to improving technology.

4. Silver and other commodities can outperform gold for years because they are at the low-end of their valuation relative to the CPI index (oil and platinum are less than one-third of their ratios with CPI), but long-term, it points to gold holding its value better. The Julian Simon argument might hold for most industrial commodities.