A long time friend in the business passed along the following link to a Time Magazine article written in April of 1980.  The article provides some perspective on inflationary troubles at the time that make today’s concerns pale in comparison.  While there are some remarkable parallels between now and then (a highly contested Democratic primary between Carter and Kennedy and runaway commodity prices, including gold), there were also some amazing differences.   The CPI at the time was at 18% and the prime lending rate was an astonishing 19.5%, both substantially above current levels. 

At the time the article was written, gold had plunged from its high of $850 to $460 per ounce and the actions of speculators like the Hunt brothers attempt to corner the silver market had come to light.  In spite of the plunge in gold, the author and economists of the day were clearly concerned that inflationary pressures would remain and perhaps threaten the entire decade of the 1980’s.  Of course, we know in hindsight that inflationary pressures eventually plunged, ushering in a significant period of strength for stocks.  The point my friend makes is that the price of gold may be a better predictor of inflation than most economists, as gold had already plunged by nearly 50% at the time the article was written.  

While gold has come off its highs recently, it certainly hasn’t plunged as it had done in the 80’s.  And yet at the same time, in spite of very high commodity prices today, the CPI remains relatively tame at 2-3% — a far cry from 18% at that time.  Of course, rising commodity prices today may have more to do with emerging markets demand, but perhaps there is a speculative element at work as well, and today’s Hunt brothers are just still under cover.  
But again, it is remarkable that inflation and interest rates have remained so low in the face of today’s commodity price gains, including gold.  This, at the very least, suggests that we’ve enjoyed massive productivity gains that simply weren’t there during the early 80’s when the creative and competitive spirit of most of the world’s people were held captive by closed markets and communist regimes. 

At the very least, the article offers a good look at history and may suggest that paying attention to gold prices has some merit.  But then again, times are always different and today, there are far fewer Iron Curtains.