Gold Has Retained Purchasing Power over the past 100 Years

As it happens, I am rereading the masters thesis of my economist father, Edward C. Harwood. He went on later to found the American Institute for Economic Research.

In his thesis, he cites the example of a car factory (this is 1931) that produces 100 cars a week. He gives the value at market of the weekly production at 100 pounds of gold.

In those days, the dollar was calibrated at $20.67 per ounce of gold. That puts the dollar value of the 100 cars at 100 pounds of gold x 16 ounces x $20.67 = $33,072, or $330.72 (in 1931) per vehicle.

Using today's dollar exchange rate with gold, we get the following:

100 x 16 x $1,713 = $2,740,800, which is $27,408 per vehicle.

The average price for a car in the US in 2019 is $36,718 according to Kelley Blue Book. I find that incredibly high, but according to a few articles I have read, this is indeed the average price of a light vehicle. One writer chocks the high price up to high demand and easy credit terms. This is possible, especially when you look at the demand for the bigger SUVs and light trucks.

But my fundamental point is that one can still buy a decent car for about 16 ounces of gold. Here's a 1929 Ford versus a 2020 Subaru.

By Richard Smith - Flickr, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=329429

2020 Subaru - same price!

I wish that we could still buy a car for 330.72 dollars! But you certainly can still buy a car for 16 ounces of gold.

Is Gold Building Up To A Bubble?

Much of the appreciation for gold comes from the East, places like China where the people know gold not only as jewelry but also as "the" store of value.

Other nations are beginning to wake up to the insufficiencies of fiat (i.e. unstandardized paper) currency, if we are to judge by gold's recent price levels (over $900 an ounce and equally as high in all currencies).

Perusing through some nice Wall Street Journal video clips, I found this one about China's love for golden effigies of their yearly animal. This year, it's the rat, and so you get this:


[Thanks to the Wall Street Journal and Reuters for the photo. See the video called "Gold Rats for Sale" here. Be sure and change the tabs at the top for more choices.]

With the dollar's continued devaluation the gold price should be going upwards even more, unless the Federal Reserve Governors start making noise like they want to stop the printing presses, and I'm not holding my breath until they do.

But you see, that's the problem with living out your self-aggrandizing fantasy: Once you take the job of Governor of the Federal Reserve Board (never mind Chairman), you have to act like you know what you're doing, even though this is scientifically impossible.

The Fed Governors' reaction? Do what your buddies suggest you do, no matter if your Wall Street and former Fed-chairman friends are actually your enemies.

Our government legislators are in the same predicament. Their reaction to this uncertainty? Do what feels good. Send checks to voters, even though the money is just more debt the taxpayers will have to reimburse at some point in the future.

We may see a change in the euro-dollar rates over the next coming months, as the European Union caves in to pressure from the dollar's weakness and from discord in their internal bond markets. But I doubt you'll see much change in the dollar-gold ratio for a while yet.

We still have a long way to go to get our heads out of the water in this housing/credit maelstrom, in reaction to which the government and its agencies (like the central bank) will continue to overreact, making a bad situation worse. (For more, see this post.)

I suggest that some economics wonk check out this Sybilian conjecture: In a fiat environment with legal private holding of gold, gold has always been and will probably always be the last bubble before any semblance of sanity returns.

Balance of Payments: You Can't Fool All of the Market All of the Time

Foreigners are buying up US assets, most visibly those good-sized percentages of our flagship financial houses. I hear cries of horror around me, as though some rat were trying to sneak out the door with the Christmas turkey.


[Thanks to bahasa-malaysia-simple-fun.com for this image.]


No, it's very simply market-balancing forces at work.

You don't remember this, but there was a time when nations held gold as reserves to back their currency and as international money for trade adjustments. In those days, purchases made between countries were settled on paper for a while; but then, on a regular basis, the accountants reconciled their books and a ship left the harbor of one or the other nation with a hold full of gold, to settle up.

Nowadays, we see no such reckoning of the books, but instead a ridiculously ever-increasing, multiple-zero figure of balance-of-payment debt (the "current account deficit"), or balance-of-payment credit on the other side of the equation, that just keeps on accruing and that has now almost reached a trillion of net debt owed by the US to other nations.

Using a different statistic, foreigners now hold something like 2 trillion dollars worth of treasury and other agency debt. It's as if we owed that much to the bank, so to speak, before deducting what others owe to us.

Remember Reagan's illustration of what a trillion is? “If you had a stack of $1,000 bills in your hands only 4 inches high, you would be a millionaire. A trillion dollars would be a stack of $1,000 bills 67 miles high.” (Source.) This kind of puts it into perspective.

Today, therefore, because there is no gold-for-currency backing system, there is no automatic accounting mechanism that forces countries to settle their accounts on a regular basis. But that doesn't mean that such reckoning will not take place at some point.

Well, that's what happening now. Creditor nations--Abu Dhabi and other Arab nations, Singapore, Japan, China, et al.--are getting sick of piling up dollar bills now that these pieces of paper are losing value. They've decided that before they become worthless, they might as well be put to use to acquire something.

They can't get gold, and because they still like American assets (thank goodness), they have decided to buy what looks cheap. What's the best deal on the market right now? Well, without making a thorough study of the question, I'd say we should look for companies that are in trouble. We certainly have a few of those lying around. How about Merrill Lynch, Citigroup, or Morgan Stanley? We can even find some European goods for sale in dollars, like UBS for example, a good Swiss banking asset.

We should see more of these acquisitions in the next year or so. Why, I'll bet you that by a dozen months from now they'll be buying apartments and houses in our big cities. Oh, wait a minute, I'm seeing news of a few sales already. I would guess that the party's just getting started.