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What is purchasing power?

Purchasing power is a gauge of how much a currency, usually a paper money supply can buy. Inflation, targeted by central banks and governments to increase the money supply, typically means the value of a currency is worth less over time and acts to reduce that currency’s purchasing power. If you take the pound as an example you can buy less with it than you could 10 years ago – that means its purchasing power has gone down.

One way to look at purchasing power is by taking the price of an asset such as a house. Thirty years ago, £250,000 would have given you much greater purchasing power because you would have been able to afford a wide range of options, sizes and locations. Now £250,000 will give you access to a limited amount of housing stock. This is because the price of housing has gone up and so, concurrently, the purchasing power of your £250,000 has gone down.

The above chart shows the decline in the purchasing power of the pound. Source: ONS

Gold is one way of retaining your purchasing power because it is seen as retaining its value. Over the last thirty years gold has gone up significantly in pound terms. This represents a rise in the cost of gold, so if you were buying gold now you could rightly say the pound has lost purchasing power against gold because you can afford much less gold than you could previously.

However, if over time, you transferred your wealth into gold by buying gold with pounds, your gold would maintain its value because it would be worth more pounds over time (having increased in value). Because gold is now fully liquid you would be able to spend it and buy the same amount, or more, goods and services as you could previously – thereby retaining your purchasing power and mitigating inflation. Gold is essentially acting as a sound money currency that has kept its purchasing power for millennia.