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Gold’s Purchasing Power

Most people have heard the saying that an ounce of gold bought a nice ‘toga’ in the hey days of the Roman Empire and still buys a comparable suit in modern times, as proof that gold has enduring purchasing power.

Despite what we have observed in the last 100 years, inflation has been generally low in peacetime and the money supply has grown gradually as populations have increased and the actual price of gold has had long periods of stability, mostly set by the powers that be. Sir Isaac Newton, as master of the U.K. Mint, set the gold price at £3.17s.10d per troy ounce in 1717 and it effectively remained the same for two hundred years, with the exception of the Napoleonic wars from 1797 to 1821.

In the US, the gold price was set officially from 1792 to 1971. Starting at $19.75/ounce, it was raised to $20.67 in 1834 and $35 in 1934. Since 1971, gold has floated freely in the global market place.

The ‘modern’ days of inflation began in 1914, with the outbreak of the first global war. The need for debt aided by increasingly growing money supply has been with us ever since. A basket of goods priced at 100 in 1914 has seen its price rise 25 times since then to near equivalent 2500.

If we use the same yearly inflation numbers in reverse, we can show that the value of money has lost 96% of its value since that time.

In order to see the changing purchasing power of gold, we can compare the ability for an ounce of gold to buy the changing value basket over the last century. With gold fixed from 1914 at $20.67/oz, you can see the falling purchasing power of gold until the sharp jump when gold is re-valued in 1935 to $35/ ounce and then it falls again as the yearly basket increases in price with a fixed gold price. The next large jump in purchasing power happens when the dollar comes off the gold standard in 1971 and the floats freely.

It is easy to understand how the purchasing power of gold would drop with a fixed gold price but clearly there was a long period between the incredible highs of 1980 and the lows of the ‘Brown bottom’ before gold turned up strongly. While these swings will be much muted in other currencies, we must accept that although gold’s high in 1980 was an outlier, gold has doubled in purchasing power since the outbreak of the first world war.