Price Adjusted, Gold Used To Be $20,000 An Ounce

Expressed in 1998 US Dollars the price of silver peaked at $806 in 1477 . Gold was around $14,000.  $20,000 today. Both have been lower since. 

I was clearing out some old material and found a chart from Forbes, 1 June 1998 issue, that shows the price of silver in constant 1998 dollars from 1344 to 1998.  The price has fallen almost consistently from around 1524 to 1998.  I presume from the discovery of new sources of supply in North and South America.

By 1750 it was around $200.  By the early 1800’s it fell to $60 and stayed there until about 1900.  By the mid 60s it was around $20 and by 1998 just $6.25.  Today it is about $20 or around $14 in 1998 dollars.

Silver prices have been severely challenged by things that affect commodities in general.  New discoveries in the 1500s, the late 1700s, and the 1860s, hammered prices down.  Silver had a big run in the late 1970s, but was quickly repriced as the early 1980s chaos was resolved and Kodak started to lose ground as a major consumer of silver.  Today, digital pictures use no silver and film is negligible.  Semi-conductors use more now but even that is not growing as fast as the overall market.

Supply goes up and demand falls, price goes down.

While silver is interesting, gold is even more fascinating.  From 1344 to about 1830, the price of gold ranged from 15 to 20 times the price of silver.  The ratio spiked up with the civil war to more than 40 times.  Strangely silver did not move then, but the price of gold, in 1998 money, was in the $3400 range.

Since 1900 the ratio has been quite volatile.  From a low of about 25 in 1920 and 1973 to a high of 153 in 1939.  $700 to $2300 in 1998 dollars.  In the late 60s the ratio bottomed at 25 or so once again.  Gold was worth about $700 in 1998 dollars. Since then gold has been volatile relative to silver.  And silver price has varied immensely too.

The ratio now is around 65 which is about the middle of the range since the American Civil War.

What to do?

First notice that silver is a commodity first and some other kind of asset later.  It is not much of an inflation hedge.  The current $14 price in 1998 money is less than 2% of its peak value.

Second notice that the ratio matters.  Maybe silver is better relative to gold.  Or not.

Next notice that gold and silver are like all other commodities and it is possible to value them in terms of purchasing power.  What do you need to believe to make gold or silver worth twice as many dollars as they worth now?  Gasoline at $10 per gallon.  Cornflakes at $15.  Butter at $8.00.  Everything will move together.  What would your gold and silver do for you then?

Finally notice that it is not difficult for a government to confiscate metals.  They have done it before and in many places.  If the metals go to double, it might not matter much.  Especially if you have lost the metals for paper money at an unknown conversion rate.

Taken by themselves, you can make a compelling case for owning gold and silver.  Once you put them in context of the entire economy, the case is less clear.

If metals make you feel safer, then they have value for you.  Feeling better is worth something, so please feel free, but do not expect to increase your net worth because you have purchased them.

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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com

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