Wednesday, July 20, 2011

Gold and the Question of Value: Part Two

Here is a great piece that describes well the value of gold using the traditional example of a men's suit to indicate value.

Value is defined as:  An amount, as of goods, services, or money, considered to be a fair and suitable equivalent for something else; a fair price or return.

It boils down to this fundamental equation. When you have finished your hard-earned labour for the day, you expect recompense that reflects that labour. Once gained, you would like to preserve that value, or wealth, for future use.

Here is the piece from Crawling Road:

Gold is a preserver of wealth that is compact and historically viewed as valuable. It’s not an investment in a traditional sense. If you want growth of your capital you should rely on stock investing and bonds. If you want preservation of capital, then gold can help by protecting you from high inflation or other unexpected events.

Gold in a portfolio is a way to take money off the investment gambling table and putting it away so you can’t lose it easily. Further, a couple attributes of gold that are unique is that it is impervious to political shenanigans which can affect a paper currency and it can be owned in a way so that it is nobody’s paper promise to you.

As one gold dealer said: “Nobody ever went to the poor house buying gold.”

These are distinct features that stocks, bonds and cash do not have and is why it is important to hold some gold as part of any investment portfolio. Gold by itself will not grow your wealth, but it has an uncanny ability to protect what you do have when your other investments aren’t doing well.

In terms of protecting from inflation, gold is hard to beat and has a very long track record of preserving purchasing power. Let’s look at some historic prices to see how this works.

An ounce of gold in 1900 was officially set at about $20 an ounce (actually $20.67). Since gold and the dollar were the same (gold standard) a $20 bill or a $20 gold piece was about one ounce of gold (slightly less than one ounce actually).

We can look at historic prices and see what happens here:

Let’s take for example a suit of clothes. This is the classic example of gold wealth preservation. Some historians have noted that one ounce of gold today would buy you a suit, a belt, a shirt and a pair of shoes. One ounce of gold in 1900 would do the same. One ounce of gold at the founding of the country would do the same. And some have said that going back to Roman times it would have bought the equivalent.

Obviously, the suits here are not the same so there is some price fluctuation. But I think the idea holds that one ounce of gold does preserve purchasing power. The prices for the suits and gold are from October of that year.

1900
Mens suit, worsted, 7.00-16.00/each
One Ounce Gold: $20.67

1940
Mens suit, tweed, 25.00/each
One Ounce Gold: $35

1970
Mens suit, shaped double-breasted, wool, 56.95/each
One Ounce Gold: $35 * (in 1971 we broke the gold standard. This official price was too low. By 1972 the gold price shot to $65 an ounce essentially matching the prices from previous decades in terms of purchasing power.)
– Gold standard broken in 1971 – Gold allowed to float against the dollar and inflation went into the double digits.–

1980
Mens suit, wool worsted, 425.00/each
One Ounce Gold: $661
(Note the price increase since 1971 when we abandoned the gold standard and inflation raged)

1990
Mens suit, Evan Picone, wool, 279.99/each (inflation finally under control)
One Ounce Gold: $380

2000
Mens suit, 375.00-475.00/each
One Ounce Gold: $270

2007
Mens suit, $400-600
One Ounce Gold: (approx) $700

Keeping in mind that we don’t know the suit quality differences, if they included a shirt, how much the shoes would be, etc. I’d have to say that gold did what the advocates stated. It varied up and down through the years a little, but if you had that same one ounce gold coin from 1900 and walked into a store today you could purchase a modern suit with it and have some money left over. Gold in fact preserved purchasing power over this 100 year period.

Again, gold is not an investment in a traditional sense. It pays no interest or dividends. But if you want to have an asset that doesn’t lose value then the empirical data suggests that gold does work.

There are many ways of discovering value. They can even be cultural in nature. For example, marrying an '8 cow woman' in one culture is considered greatly worthy!

Whatever we decide is true value, it must be protected from the immoral machinations of the fiat money system.

Gold in New Zealand dollars: $1857.81 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $45.62 per oz
Previous all time high: $59.19
per oz

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The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001
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