Inflation, Gold and Confusion

Until 15 August 1971, gold was money in the United States. At least for foreign governments. It stopped being money for citizens in February 1934 when it became illegal to own it or to benefit from gold price clauses in contracts.

After making it not money, it should behave like any commodity.  Oil, copper, cotton or zinc.  But it does not? If you think you should invest in gold, you might wonder why.

It has to do with what money is.

Money has several purposes. It is a medium of exchange, it is a unit of account and it is a store of value. Barter is very inefficient and so a unit of exchange allows barter to happen without time constraints or exchange of physical goods. Accounting needs a way to keep track, so the unit idea. People do not want to trade their goods or services for nothing,  but they don’t always want to consume immediately either. They need a way to store value.

The unit value for accounting is a problem. I am 190 cm tall and you know what that means. If I tell you oil was $2.77 per barrel in 1948, what do you know? Not much. “$” is not like cm.  It is not a constant.  There is no universal standard in a sealed room in Paris for “$.”

That causes a communication problem. Confusion is your enemy.

With confusion comes questioning the store of value part. If inflation erodes the value of money over time, should I store money? If not money, what?

Enter gold. It is not money any more, but it is convenient to buy and store. If people will accept it in exchange then it can be a store of value.

$1,000,000 is about 26 kilograms of gold. Less than 60 pounds. Gold is very dense so the space it occupies is small. A million dollars is about the size of a 13″ laptop. Easy to store, easy to ship. Copper would do too, but $1,000,000 of copper weighs 180 tons and takes up 650 cubic feet.  A small bedroom full. Gold is convenient.

The problem with gold being a commodity, is it’s hard to predict value. Since 1970, it has been worth anywhere from 9 to 30 barrels of oil. $100 has been able to buy anywhere from 1.1 to 27.8 barrels of oil.  Neither of those ranges looks like a store of value.   I want a predictor of the future spending value of my wealth. That is all I care about.

It would be nice to have a known unit of value for money, but we do not and gold won’t do it for you either.  You must acquire some skills that help you cut through the confusion of a variable unit of measure.

You must think meaning.  Think of money in use not in storage.  When I was at University $20 was a lot of money to me. My grandson would see $150 or so the same way.  One of my children once asked for $20 to go to a movie with a girl.  I said, “$20! Do you have any idea of the value of money?”  He said, “Yes, that’s why I want $20.” Might be $40 now.

It is not easy to keep track and it is probably smart to estimate the effect of inflation from now to the end of your lifetime. It will help you understand and change your perspective on saving. 2% inflation will double the price of goods in about 36 years.  Check out the rule of 72.

Good news and bad news.  The good news, U.S. national debt in 1970 was about 50 ounces of gold per person and that is almost exactly where it is today.  The bad news, average income was 175 ounces of gold then and is now about 45.   You could look it up.

I wonder if governments everywhere do better than their people?

A variable unit of measure puts store of value in question and sews confusion in planning. You must learn to cut through the fog.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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