Inflation and gold

February was a disappointing month for gold. Between 2 and 27 February, the gold price in US Dollars dropped by 7.3% and in Pounds Sterling it fell by 4.6%. January had been much better; in Dollar terms gold was up 5.7% and in Pounds Sterling up by 3.8%. These kinds of ups and downs are a regular occurrence for gold. Last year, the Dollar gold price was down 0.2% (while up 11.6% in Sterling) while the S&P 500 lost more than 19%. Historically, gold tends to be negatively correlated with stocks – when the gold price goes up, equity prices tend to fall and vice versa. The S&P 500 index ended the year 2013 more than 32% up; Dollar-priced gold fell 28% the same year. Yet in 2010 the Dollar gold price rose almost 30%, while the S&P 500 rose by more than 15%.

The reality is that we are all living in an upside down world – it’s not that gold is going up in price, it’s that fiat currency is going down in purchasing power. The Dollar and the Pound have both lost more than 90% of their purchasing power in the last 100 years.

As well as maintaining its purchasing power, gold provides security and reliability and insulation from the kind of systemic risk we encountered in 2008. It gives us freedom from the whimsicalities of central banks. From time to time confidence in fiat currency temporarily increases or decreases but its fundamental trend historically is to decline.

In 1900, the average price of an expensive men’s suit was perhaps around $35; that year the price of gold was $20.67 per ounce. Priced in gold the suit would have cost around 1.7 ounces. A similarly high-quality suit today might cost $2,000; assuming a gold price of $1,800/oz, the suit priced in gold today costs a little over 1.1 ounces of gold. So in gold terms, the price of the suit has dropped a little over 35% since 1900, but priced in Dollars it has increased by 5,614.3%. 100 years ago £1 would have bought you $5. Today, the Pound trades close to parity with the Dollar.

In any case, the reason to hold gold with Glint is primarily because Glint enables you to use gold as money, freed from anxiety about the declining purchasing power of fiatcurrency. Investors looking for a portfolio diversifier can take advantage of having a great diversifier that can also be used as money.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.