Thursday, November 19, 2009

Gold Hits Record High! Or Maybe Not

We’ve had no shortage of headlines proclaiming “Gold Hits New Record!” When you’re in the business of writing something new every day, it’s easier to write about gold prices than to find something substantial to talk about.

Leaving the value of such reports aside, are they true? Well, recent stories announced that gold had reached US$1150 per ounce. Back in 1980, gold peaked at US$850 per ounce, which is obviously a smaller number than US$1150, but what about inflation?

US$850 in 1980 had the same buying power as US$2230 has today. So, an ounce of gold today has a little over half the buying power it had at gold’s peak in 1980. I’d say that this is a much more reasonable way to judge the price of gold, but it makes for less exciting headlines.

If we look at everything in absolute dollars, we can pump out headlines for record prices of many items every time inflation nudges up another 0.1%. Alarmist stories are great for reporters, but not much good for readers.

Wake me up if gold punches through US$2230.


  1. I sometimes think about how much wealth the captains of industry had back in the day. John D Rockerfeller was amazingly rich back in the 1920s, as a percentage of GDP.

    According to Fortune, his wealth was 1/65 of GDP at his death in 1937. Bill Gates's wealth in 2006 was 1/152 of GDP. This isn't really a real dollars comparison, I suppose.

    Rockerfeller had $1.2 billion at his death in 1937. Still, my computer is way faster than his was, and my TV renders better colour.

  2. Hey but in 1980 you couldn't mail your "spare" gold into a company and have them send you a cheque for 36% of it's actual value, so that is progress.... I think.

  3. Gene: Wealth as a fraction of GDP is an interesting way to look at it. It sets an even higher bar than just adjusting for inflation. In many ways, it's better to be middle class now than wealthy 70 years ago. On the other hand, you have a better TV but not the knowledge that you're the top dog.

    Big Cajun Man: I'm thinking of starting a similar service for cash. Counting a pile of bills can be a pain. Mail it all to me and I'll deposit 36% of its value into the bank account of your choice.

  4. In your estimation, what fraction of the population really understands (i.e., internalizes) inflation? My guess is the number is small, but, perhaps this only applies to my cohort (late-20s). I mean, I know many people have heard the "when I was a kid you could buy X for a nickel" from their elders but very few grasp that they effectively take a pay-cut every year they don't get a raise, cash in the bank is losing real value, etc. I have met numerous 30-something professionals with graduate degrees who don't know the difference between inflation and deflation. In my view most journalists are writing to the fattest part of the bell curve.

    Michael: where can I sign up for your service!?!

  5. Ace: Understanding inflation involves thinking and math. I vaguely remember a famous quote about how people would rather die than think. So, you're probably right that few people really internalize an understanding of inflation. There is no need to sign up for my service -- just mail in the money :-)

    CC: You're right that government deficits are another area where nominal figures give misleading results. I'm sure there are many other examples as well. Sadly, some headline writers probably understand this as well.

    1. The second reply above is to Canadian Capitalist's comment:

      Using nominal figures is confusing in so many areas. Another example is news reports on deficits. They'll scream record deficits, by which they mean record deficit in nominal dollars. The numbers are never put in context of "relative to what".

  6. Got a chuckle out of the ads accompanying this post... the G**gle algorithms may need some work

  7. Ace: That seems to happen to me a lot no matter what I write about. Maybe I should just sell out and start singing the praises of every type of financial product :-)