Another Way to Think of the Price of Gold

by Lear Capital EditorialFebruary 11, 2015

One interesting thing about gold is its relative stability and value throughout history. Currencies come and go. They get deflated, inflated, and corrupted; or the regimes that control them fall from power. And yet, throughout time, roughly one ounce of fine gold will buy a finely tailored men’s suit. This was the case when the suit was called a toga – and no I don’t mean your college days! I mean during the Roman Empire. Sure enough, today if you look for a custom tailored suit, you can pay roughly the equivalent of an ounce of gold. Yes, you can pay less, but I’m talking about the good stuff!

That is why it can be so flawed to judge gold based on its price only in dollars. If you think about it differently and understand the facts, you can see that it is not so much gold’s value that is fluctuating, but the other paper currencies that rise and fall.

This dynamic has never been more pronounced than it is in today’s currency wars, which are heating up by the day. The Swiss decoupled from the euro and their franc jumped in value. This also means that gold became “cheaper” for the Swiss. The European Central Bank has just announced new QE to pump new currency into their markets, which makes the rest of the euros in circulation less valuable. It means more euros will be chasing the same amount of goods, which means the prices of everything, including stocks, go up. Does this mean their stock market is doing great? Does this mean their productivity will actually improve just because their market goes up? It depends.

You have to adjust for the purely nominal increases that are due to simple price inflation, and evaluate any increased productivity left over after that.

Remember when gold hit its record highs in 2010 and everyone wondered if it was overvalued? This coincided with the dollar’s low point. And yet, most of the mainstream analysis was only concerned with what was going on with gold. The Keynesian analysts always seem to be asking the wrong questions. What was impacting the dollar at the time? It wasn’t how much you were paying for gold, it was how much gold your dollar could get you!

It wasn’t a gold problem; it was a dollar problem.

You see, it all comes down to purchasing power. What good does it actually do to have more dollars in your pocket if you get less for them?  Psychologically, you might feel richer – until you pay your bills.

And what if you are among the unlucky ones in an inflationary period who doesn’t get the benefit of more dollars but must make do with higher prices?

It is purchasing power that matters! It is not the dollars or the euros or the francs or even the gold that you really want. It is the assets and necessities you can purchase with them! It is the stability and peace of mind from saving that is important. But if you are saving in a rapidly depreciating instrument like dollars, what good does that do you? How good would a $1 million nest egg look in a future where an average car, say a Toyota Camry type car is around $200,000?!? Yet, go back 50 years when a car was around $2650 and median income was $6450. What do you think they thought a comfortable next egg might be? If you had instead bought a car’s equivalent of gold at the time (at $35/ounce) you would have close to $100,000 today.

Again, the question is – what are our central bankers and politicians doing to the dollar?

No one knows what the future brings, but all signs seem to point to more currency devaluation, price inflation and instability. When those issues ravage the rest of your portfolio, you’ll be grateful you have a foundation in something solid, stable, that moves independently and even counter to the nonsense!

Historically, gold has served that need, without compromising returns, for the savvy investor.

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