April 14,2009 – An old Chinese saying declares that wisdom begins by calling things by their right name. Truer words could not be spoken about gold. If you call gold by the wrong name, you begin down the wrong road, which is a serious handicap. It can easily prevent you from understanding why you should own gold as well as how to determine its value. The point is that gold is not an investment; it is money.
The following table presents gold’s performance over the past eight years in terms of nine different currencies.
| USD | AUD | CAD | CNY | EUR | INR | JPY | CHF | GBP | |
| ———— | ———— | ———— | ———— | ———— | ———— | ———— | ———— | ———— | |
| 2001 | 2.5% | 11.3% | 8.8% | 2.5% | 8.1% | 5.8% | 17.4% | 5.0% | 5.4% |
| 2002 | 24.7% | 13.5% | 23.7% | 24.8% | 5.9% | 24.0% | 13.0% | 3.9% | 12.7% |
| 2003 | 19.6% | -10.5% | -2.2% | 19.5% | -0.5% | 13.5% | 7.9% | 7.0% | 7.9% |
| 2004 | 5.2% | 1.4% | -2.0% | 5.2% | -2.1% | -0.0% | 0.9% | -3.0% | -2.0% |
| 2005 | 18.2% | 25.6% | 14.5% | 15.2% | 35.1% | 22.8% | 35.7% | 36.2% | 31.8% |
| 2006 | 22.8% | 14.4% | 22.8% | 18.8% | 10.2% | 20.5% | 24.0% | 13.9% | 7.8% |
| 2007 | 31.4% | 18.6% | 10.4% | 23.0% | 17.9% | 17.5% | 24.7% | 21.5% | 29.2% |
| 2008 | 5.8% | 32.5% | 32.4% | -1.1% | 11.9% | 30.4% | -14.9% | 0.2% | 44.3% |
| Average | 16.3% | 13.3% | 13.6% | 13.5% | 10.8% | 16.8% | 13.6% | 10.6% | 17.1% |
Given the exceptional results in the above table, gold at first blush looks like a great ‘investment’. After all, for eight years it has produced double-digit rates of appreciation against nine of the world’s major currencies.
But consider this table in relation to the following chart, which presents a base-100 analysis of crude oil prices in terms of four different currencies – US dollars, British pounds, euros and goldgrams. The analysis presented in this chart assumes that one barrel costs 100 units of each currency as of January 1950, and then calculates the month-end price thereafter based on the actual dollar price of crude oil and the prevailing dollar rate of exchange to each currency.
We can see from this chart that the price of crude oil in terms of gold is basically unchanged over this 59-year period. In other words, a gram or ounce of gold today buys essentially the same amount of crude oil it did in January 1950. Clearly, that result would make gold to be a lousy investment. There has been no appreciation from owning gold. You can only buy the same amount of crude oil with gold that you could in 1950, not more.
A so-called ‘investment’ in gold has generated zero return, but owning gold has nevertheless achieved something very important. Gold has preserved purchasing power over this period, which is what money is supposed to do. This observation raises some interesting questions.
How can the above table and graph be reconciled? How can gold achieve double-digit rates of appreciation this decade against the world’s major currencies but still buy an unchanged amount of crude oil?
The answer is that gold is not really appreciating. Instead, the US dollar and eight other currencies in the above table are depreciating. They are losing purchasing power, but this reality explaining this deficiency of national currencies is not new. Here are the words of Henry Thornton in his book penned in 1802, “An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain”, explaining gold’s unique attribute in this regard.
“We naturally imagine that the spot on which we ourselves stand is fixed, and that the things around us move. The man who is in a boat seems to see the shore departing from him, and it was the doctrine of the first philosophers that the sun moved round the earth, and not the earth round the sun. In consequence of a similar prejudice, we assume that the currency which is in all our hands, and with which we ourselves are, as it were, identified, is fixed, and that the price of bullion moves; whereas in truth, it is the currency of each nation that moves, and it is bullion, the larger article serving for the commerce of the world, which is the more fixed.”
Thornton’s observation remains true today. The price of goods and service are best measured in terms of gold, which enables a clear view of how badly national currencies are depreciating. Gold preserves the purchasing power of those who own it.
So always keep in mind that gold is money, not an investment. It therefore has to be analyzed as money, and to do this, it has to be compared to other ‘monies’. These are of course “the currency of each nation that moves”. In his 18th century vernacular, Thornton means these currencies inflate and thereby lose purchasing power.
In the final analysis, there are two things one can do with money – spend it or save it. Saving money is always a good thing. For the past eight years it has been particularly wise to save gold – to accumulate it in order to build-up your savings. This strategy continues to make good sense. So save gold; don’t view it to be an investment. Gold is money.
My objective is to share with you my views on gold, which in recent decades has become one of the world’s most misunderstood asset classes. This low level of knowledge about gold creates a wonderful opportunity and competitive edge to everyone who truly understands gold and money.
