Letter Re: One Way to Visualize Inflation and Dollar Devaluation

CRW points out that:
If you had $1,000 in 1900, you could have bought 50 ounces of gold with it, yet today, a thousand bucks will buy only about one ounce of gold Clearly, gold has held its value better than numbers on paper. Fine, but that’s a fairly useless observation.

Consider: gold doesn’t hold its value as well as other things. The overall consumer price index has increased by a factor of only about 32:1 during the same time; that is, gold has failed to hold its value relative to consumer products, primarily because refined gold was already as good as it could get but other products have increased in intrinsic quality and value.

And consider this: you could also have invested your money in 1900 in an interest-bearing savings account at an average rate of return of four percent per year (conservatively less than the actual historical average), and today you’d have almost $72,000. You could get about 72 ounces of gold with that. In other words, keeping your money in gold would have lost you some of your money relative to investing it even at a low, reliable interest rate.

Or you could have invested your money in stocks.

From January 1900 to June 2009, stocks in the Dow Jones Industrial Average appreciated from an index value of 66.1 to 8,447, a ratio of 12s8 to 1. If you’d given up your gold in 1900, you could have turned it into 128 ounces of gold today, in spite of all the stock-market crashes between then and now.

Over the same time, the S&P composite index appreciated from 6.1 to 921.9, a ratio of 151 to 1. Even better. (And I note that even this result represents an average rate of return of only a little over 4.7%– which shows that the stock market isn’t necessarily better in the long run than safe interest-bearing accounts. This conclusion should not surprise anyone, since the returns from these accounts tend to come from the same kinds of business investments that underlie the stock markets, but it’s not generally well understood.)

Inflation isn’t even in the top 20 of things people need to worry about or prepare for today.

You already correctly advise people to buy durable goods instead of gold. Naive comments like CRW’s only distract people from that message.


JWR Replies: While his premise does disregard the macro-level investing world, it does illustrate gold’s relative stability versus non-invested paper currency. (What is commonly termed “mattress money.”) It is often mentioned by Austrian School economists that a century ago, one ounce of gold would buy a good men’s suit. It still will, but a $20 bill certainly won’t. Nor will a German 20 Papiermark note. (And the later Mark notes went to almost zero in 1923.)

I cannot over-emphasize this: Gold is not an “investment”. It is merely a safe store of value in times of monetary crisis. Neither I, nor writer CRW have suggested “investing” in gold. For absolute safety, there are very few stores of wealth that can match gold. Granted, on average, stocks would have gained more than gold. But diversified risk wasn’t an option until advent of the first mutual fund in 1928. (The Wellington Fund.) Countless individual stocks have gone bust, and their certificates are now only good for wallpaper. And, granted, savings compounded in an interest-bearing bank account would have also gained more than gold. But until the advent of the FDIC, lots of individual investors lost money in bank failures, too.

I believe a balanced investing portfolio should include some precious metals, but only after key logistics have been secured. To clarify: hedging with some silver and gold is only appropriate after you have your beans, bullets and Band-Aids set aside.