Editor’s note: The following post by Rodil appeared on the Southern Arc Minerals (TSX: V.SA, Bullboard) Bullboard at 2:08pm EST on February 14. It has been edited for spelling, punctuation and grammar only, in an effort to make it easier to read. Click on the text link within the post to view it in its original form.

Several days ago, a friend of mine (who has been a coin dealer since the 70s) and I were doing some brainstorming. I noted that the price of gold at its bottom in 2000 ($255) was 1/6 of the inflation adjusted price of gold in 2000 (using 3% per annum inflation, starting in 1980 from a $850 top price). That inflation adjusted price of gold in 2000 was $1535. I posed the theory that as there are times when prices undershoot, there should be times that prices overshoot. I set myself the task of finding the inflation adjusted price of gold, and then to use this as a comparative of where we are today and see if there were some patterns that began to look evident. When I went in to this exercise I was aware that government inflation numbers are self-serving to them, yet certain patterns might still appear despite government propensity to understate inflation. Anyway, I thought I would find a time that there was an overshoot and thereby gain another tool to know when an overshoot might be taking place.

I found out a lot, but not what I expected.

I went back to 1914, which was the year after the Fed was formed and began adjusting the price of gold for inflation (using government numbers). I found that in 1920, 1967 and 1970 the price of gold was 1/2 of the inflation adjusted price of gold ($42.11, $70.87 and $82.48 respectively). I classified these as undershoots. From 1934 - 1942 the actual price of gold was higher than the inflation adjusted price of gold, but not a double. I classified these as overshoots, but small overshoots. So far no big deal. There were some other stats that looked intriguing to me, but are not necessarily pertinent to the thrust of this piece, so I'll leave them out.

Things began to change in 1973 when the real price of gold went above the inflation adjusted price of gold for the first time since 1942 ($120.17 real vs. $94.31 inflation adjusted). From 1973 to 1978 we did not get a double on an overshoot. On June 8, 1979, we got our first double overshoot when the real price of gold closed at $280 versus the end of 1978 inflation adjusted price of $138.59. When gold peaked at $850 in January of 1980 its price was 551% above the inflation adjusted price of gold for 1979 ($154.14). For 2007, the inflation adjusted price of gold is $540.95. An overshoot on the magnitude of January 1980 would put the price of gold at $2,975 an ounce. What is interesting is that we don't even have a double overshoot since this bull market began. This bull market is yet young.

In looking back at this I noted that the juniors really began to run in the second half of 1979 which was almost to a day when the price of gold achieved its first double overshoot over the inflation adjusted price of gold. I expect that we will see a higher inflation adjusted overshoot in this bull market, because there is more of the world participating in the gold market and the G7 economies are awash in fiat currency with the majority of the world’s manufacturing moving to those nations that are hard asset inclined. I'm still chewing on this data and will post some other tentative conclusions at a later date.