Archive for March 19th, 2009

Gold vs CPI

March 19, 2009

Gold as a store of value  

I appreciate all the comments on my article. Even those who call me an “idiot” will not be surprised to learn that my wife agrees with them at least once a week. In an effort to diminish that view I have done a bit more research to compare gold with the CPI (consumer price index) as published by the Bureau of Labor Statistics. The CPI is available from 1913 to the present. I selected, again, the annual values to compare with the annual spot price of gold. Several comments suggested gold is an insurance policy against inflation I presume.  Others suggested gold is a “store of value” (SOV) not an investment, again I presume against the loss of value due to inflation. At least one excoriated me for ignoring the fact that ownership of gold was prohibited until 1974.

 

The comment about gold ownership being prohibited until 1974 ignored the main thrust of the article. Gold completely failed as an investment over the twenty year period from 1980 through 2000. Yet gold was freely traded during this time. I examined the longest possible historical record to obtain as much information as possible about the relative value of gold versus the DJIA. Yes, gold was prohibited until 1974. But ownership of stocks was relegated to a small minority of the population as well. Neither fact changes the conclusion of the article that whether gold outperforms the DJIA depends on the current economic circumstances. Neither is “best” at all times.

 

As insurance against inflation I believe gold also fails since insurance is designed to replace value dollar for dollar. If 10% of a portfolio is in gold then a doubling of the value of gold is required to increase the portfolio by 10%. Stated differently, to protect against a 10% inflation rate requires that gold (at 10% of the portfolio) double in price. Gold certainly can double in a year (or less) but it has never done so over any extended period of time and never done so during periods of low to moderate inflation. Gold only jumps in value during periods of extreme financial stress. Of course, today we are in fact experiencing extreme financial stress so gold is doing well. For now.

 

As a store of value (SOV) gold, or any asset for that matter, must also perform well as an investment. I am clearly not the brightest bulb in the chandelier but I cannot understand how a poorly performing investment can succeed as a store of value. But set that argument aside. Given a historical record of the CPI how does gold stack up as a store of value? The BLS statistics set 1982-1984 as 100 and then adjust the CPI up or down accordingly. Thus if inflation at some future time is double what it was in 1982-1984 the CPI goes to 200. If it were half the CPI drops to 50.

 

Since the 1983 CPI is set at 99.6 I arbitrarily used that as my base level for inflation. Also, since gold had been trading freely at that time I set the yearend spot price of gold, 415.00 as my base level for the price of gold. Using the base level of gold I then adjusted the price using the annual CPI figures for each year. By coincidence the CPI adjusted price of gold in 1974 was 203.78 versus the actual spot price of 195.20 which is extremely close.

 

There were several interesting results from this exercise. First, the CPI adjusted price of gold was well above the government set levels from 1913 through 1973, sometimes by 2 or 3 times. This suggests the government was arbitrarily devaluing the dollar, in gold terms during this period. No big surprise there. What was a surprise is that from 1974 through 1978 spot gold was still below the CPI adjusted level. However, even more stunning is that the only times spot gold exceeded the CPI adjusted level was from 1979-1983 plus 1987 and 2008. If we only look at the period from 1974 through 2008, when gold was freely traded its SOV function was only reliable for a single 5 year period plus two additional separate years of extreme financial stress. Obviously 2009 and beyond may add to gold’s SOV utility.

 

My conclusion is that gold as a store of value, as a hedge against inflation and as an investment is only valuable during periods of extreme financial stress. We are in such a period at the present. Gold is doing well, at the present. Stay alert for improvements in the underlying economic circumstances and protect yourself. The gold versus CPI table is available below.

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CPI Adjusted Price of Gold

March 19, 2009
Finfacts Ireland Consumer Price Index
Historical Gold Prices U.S. Department Of Labor
Source: Bureau of Labor Statistics
Global Financial Data 1982-84=100
CPI Adj.
GOLD CPI Price of
Year  Close Annual Gold
1913 20.67 9.9 40.92
1914 20.67 10.0 41.33
1915 20.67 10.1 41.75
1916 20.67 10.9 45.05
1917 20.67 12.8 52.91
1918 20.67 15.1 62.41
1919 20.67 17.3 71.51
1920 20.67 20.0 82.67
1921 20.67 17.9 73.99
1922 20.67 16.8 69.44
1923 20.67 17.1 70.68
1924 20.67 17.1 70.68
1925 20.67 17.5 72.33
1926 20.67 17.7 73.16
1927 20.67 17.4 71.92
1928 20.67 17.1 70.68
1929 20.67 17.1 70.68
1930 20.67 16.7 69.03
1931 20.67 15.2 62.83
1932 20.67 13.7 56.63
1933 32.32 13.0 53.73
1934 35.00 13.4 55.39
1935 35.00 13.7 56.63
1936 35.00 13.9 57.45
1937 35.00 14.4 59.52
1938 35.00 14.1 58.28
1939 35.00 13.9 57.45
1940 34.50 14.0 57.87
1941 35.50 14.7 60.76
1942 35.50 16.3 67.37
1943 36.50 17.3 71.51
1944 36.25 17.6 72.75
1945 37.25 18.0 74.40
1946 38.25 19.5 80.60
1947 43.00 22.3 92.17
1948 42.00 24.1 99.61
1949 40.50 23.8 98.37
1950 40.25 24.1 99.61
1951 40.00 26.0 107.47
1952 38.70 26.5 109.54
1953 35.50 26.7 110.36
1954 35.25 26.9 111.19
1955 35.15 26.8 110.78
1956 35.20 27.2 112.43
1957 35.25 28.1 116.15
1958 35.25 28.9 119.46
1959 35.25 29.1 120.28
1960 36.50 29.6 122.35
1961 35.50 29.9 123.59
1962 35.35 30.2 124.83
1963 35.25 30.6 126.48
1964 35.35 31.0 128.14
1965 35.50 31.5 130.20
1966 35.40 32.4 133.92
1967 35.50 33.4 138.06
1968 43.50 34.8 143.84
1969 35.40 36.7 151.70
1970 37.60 38.8 160.38
1971 43.80 40.5 167.40
1972 65.20 41.8 172.78
1973 114.50 44.4 183.52
1974 195.20 49.3 203.78 Gold Ownership Permitted
1975 150.80 53.8 222.38
1976 145.10 56.9 235.19
1977 179.20 60.6 250.48
1978 244.90 65.2 269.50
1979 578.70 72.6 300.08
1980 641.20 82.4 340.59
1981 430.80 90.9 375.73
1982 484.50 96.5 398.87
1983 415.00 99.6 413.34 Base Value
1984 331.30 103.9 429.46
1985 354.20 107.6 444.75
1986 435.20 109.6 453.02
1987 522.9 113.6 469.55
1988 441.00 118.3 488.98
1989 433.40 124.0 512.54
1990 423.80 130.7 540.24
1991 379.90 136.2 562.97
1992 356.30 140.3 579.92
1993 419.20 144.5 597.28
1994 409.80 148.2 612.57
1995 385.60 152.4 629.93
1996 367.80 156.9 648.53
1997 288.80 160.5 663.41
1998 288.00 163.0 673.74
1999 287.50 166.6 688.62
2000 272.15 172.2 711.77
2001 278.70 177.1 732.03
2002 346.70 179.9 743.60
2003 414.80 184.0 760.55
2004 438.10 188.9 780.80
2005 517.20 195.3 807.25
2006 636.30 201.6 833.29
2007 833.20 207.3 857.03
2008 926.72 215.303 889.93