TheNews

I like gold. My wedding ring is simple but classy. My crowns in my mouth are so good that I forget they are there. The electronic contacts in my computer work just fine. Gold is great. But not as a steady measure of purchasing power, nor as a guaranteed investment.

“Gold has the same purchasing power today that it had in 1913,” I continue to read. So let’s look at the data and see what we can conclude about gold, its stability and purchasing power, and then we’ll turn to gold as an investment.

To get an idea of the purchasing power of an ounce of gold, we’ll adjust the gold price by the Consumer Price Index. (I’ve noted elsewhere that Long-term Inflation estimates are misleading, but they are what we’ve got. Just keep in mind that your purchasing power has risen more than the CPI indicates.)



The chart shows a fairly steady price of gold for most of our history, followed by two giant spikes. We’ll get to the spikes later, but let’s narrow in on the seemingly steady period. It turns out that the era from 1800 through 1972 looks steady because those spikes require the chart’s vertical axis to be up at $2000.

If you had bought gold in 1800, you would have increased your purchasing power by 13 percent in five years. That’s not quite a stable measure of purchasing power, but given the accuracy of our price statistics, it’s in the ballpark. As an investment however, note that 13 percent over five years is lousy when interest rates are six to seven percent per year, as they were back then.

Pity, though, the person who bought gold in 1805. In nine years, his gold had lost 26 percent of its purchasing power. Gold was neither a stable measure of value nor a good investment.

The next few decades were good for gold owners. The gold price was steady while consumer prices fell. From the 1814 low until the start of the Civil War, the purchasing power of an ounce of gold more than doubled.

The inflationary years of the Civil War showed gold’s value in a time of crisis. Consumer prices rose 74 percent from 1861 through 1864, but the price of gold doubled.

Now let’s fast forward to the two spikes in the gold price series. In 1980, gold averaged $613 an ounce, though on the best day it traded at $850. By 1982 gold was trading the low $300s. It turns out that the Federal Reserve got serious about fighting inflation just as investors got serious about using gold to hedge against inflation. Ouch.

Then we had another run-up in 2011-12, with gold hitting a daily high of $1,781. As I am writing, May 15, 2014, gold is trading at just under $1,300, off 27 percent from its peak of a few years ago.

Instead of belaboring the data, let’s just say that gold’s value goes up and down. It is not a steady measure of value or purchasing power. Like all other assets, its value is not intrinsic; it has value only as people are willing and able to pay for it. That willingness and ability come and go, and thus gold’s value will rise and fall in the future.





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