Historical value of gold lies in its purchasing power

Gold is an excellent electrical conductor—but copper does the job just as well and is a whole lot cheaper.  Paul de Sousa, executive vice president of Bullion Management Group in Markham, Ont., makes the case that the historical value of gold is best measured by its purchasing power rather than the price of gold per ounce as a commodity.

You may not have thought about it. But one way of calculating the value of gold is by calculating its purchasing power.

We all know how much value currencies have lost since 1971. We also know that at various times in history, an ounce of gold could buy a man’s suit.

It still can today — especially since the price of gold per ounce is now at US$1,200 or C$1,600. In fact, depending on your taste and the extent to which you want to impress others, the price of an ounce of gold can get you two suits.

Of course, you can also use other things — cars, a home, even the Dow Jones Industrial Index — to calculate the purchasing power of gold over time. In fact, when priced in gold, a car, a home and the Dow now cost less than they once did.

Yet, gold is often viewed simply as a commodity — an approach we believe is incorrect.

Because of that, it’s interesting to track the purchasing power of gold and the U.S. dollar against actual commodities like corn, sugar, wheat, livestock, oil, tin, aluminum and copper.

Just for the record, gold, as a commodity, is valuable. In fact, it’s an excellent conductor of electricity. But it’s a pricey one. After all, a pound of gold will set you back roughly US$19,000, although at just US$2.50 a pound, copper will likely do as good a job.

The bottom line? If gold is nothing more than a commodity, it’s now wildly overpriced!

Although gold began trading again in 1971, we don’t have data for all the commodities going back that far. So, our analysis begins in 1975, which is a handicap, since the price of gold per ounce then was US$193.

In any event, let’s take this scenario. Imagine you’re out gardening and you unearth a tin can. Inside is a one-ounce gold coin, worth US$193, along with a note describing the prices of various commodities in 1975.

Corn, for example, then went for US$342 a tonne. So with an ounce of gold, you’d be able to buy only 0.6 tonnes of corn. Today, however, an ounce of gold will get you 3.5 tonnes of corn.

And although the $193 would have fetched 0.6 tonnes of corn in 1975, it would fetch just 0.5 tonnes of corn 40 years later. True, those dollars did do a fair job of preserving purchasing power. But the purchasing power of gold over time was superior.

Comparison flawed?

Yet this likely doesn’t sit well with you. “It’s not fair to compare gold to dollars buried in the ground that don’t earn interest,” you cry.

But consider this: once dollars enter the banking system, they’re subject to risk. Just ask a Cypriot, an Argentinean or anyone who has experienced a run on his bank, or who has had his accounts closed.

Of course, some folks do keep cash on hand for emergencies. And later in this article, I’ll compare the historical purchasing power of gold against greenbacks in a savings account. But let’s continue with our story of gold and dollars in a tin can.

One ounce of gold in 1971 would get you 0.4 tonnes of sugar; today, gold will give you more than 20 times as much. And although the dollar’s purchasing power has also risen over the past 40 years, you’d get just 1.2 tonnes of sugar if you used those dollars today.

Gold also tops the dollar when it comes to buying wheat. An ounce of gold, for example, will give you 3.5 tonnes of wheat; $193, just a half a tonne.

And let’s not forget the cattle pen. An ounce of gold will buy 3.7 units of a livestock index; $193, a mere 0.6 units.

Volume is higher

Petroleum shows gold’s staying power as well. In 1975, when oil went for US$11.70 a barrel, an ounce of the shiny metal would get you 16.5 barrels of the black stuff. But today, it will give you roughly 60 per cent more. With $193, however, you’d get just four barrels.

Gold bugs also score with copper. Although one ounce of gold will buy 418 pounds of copper, $193 will deliver just 16 per cent of that, or 66.1 pounds.

How about aluminum? Well, with our trustworthy ounce, we’d now get 1,581 pounds; but with $193, only 293 pounds.

Similarly, with one ounce of gold, you’d get 144 pounds of tin; but with your fiat currency, 122 pounds less.

Currency buys less

Now, let’s go back to our comparison of the purchasing power of gold over time with dollars in a savings account.

As tempting as it was to compete with U.S. dollars by earning interest through leasing our gold, we didn’t want to subject the metal to unnecessary risk. So, we kept it in the tin can!

Remember how much corn you’d now be able to buy with an ounce of gold? It was 3.5 tonnes.

Well, U.S. dollars in a savings account would get you just 2.2 tonnes. Yes, you’d be able to buy more if you had just withdrawn the dollars from a tin can.

But you’d still get less than if you had bought the corn with gold — gold that had earned no interest but had successfully preserved the historical purchasing power of gold.

Let’s continue the comparison. Although an ounce of gold will get you 8.1 tonnes of sugar, you’d get only five tonnes with the dollars from your savings account. And those dollars were earning interest for close to 40 years, remember?

Let’s go on down the list. An ounce of gold will get you 3.5 tonnes of wheat; your savings account dollars, only 2.2 tonnes.

And although one ounce of gold will give you 3.7 units of a livestock index, your dollars will give you 1.4 units less.

Example holds true

Oil? It’s 26.5 barrels using gold; 16.4 barrels with dollars. Copper? It’s 418 pounds using gold, but just 264 pounds with dollars. Aluminum? It’s 1,581 pounds using gold, but just 979 pounds with dollars. Tin? It’s 144 pounds using gold, but only 89 pounds with dollars.

So, there you have it, folks. The clear winner, despite having earned no interest, is gold.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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