Gold is a currency that is not controlled or issued by any government. It has been a better investment than US Treasuries for many years. Its price has held up remarkably well through many financial panics. It’s perfectly fine for money laundering.
But does it protect you from inflation, as many argue?
In a word: no.
The chart above tells its own story. But if it doesn’t, here’s an explanation: Shows the price of an ounce of gold in US dollars dating back to 1978, but adjusted for inflation. All prices are in today’s money, using the official Consumer Price Index as a scaling factor.
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If gold were an effective hedge against inflation—if it protected your purchasing power—this chart would be a reasonably stable horizontal line from left to right. An ounce of gold would have roughly the same purchasing power today as it did back then.
Oops.
Instead, the line looks like an out-of-control garden hose. The purchasing power of gold has changed every year.
1980-2001 gold has performed so poorly relative to inflation that it has lost about 80% of its purchasing power. Anyone who bought gold in the late 1970s or early 1980s got wiped out while stocks and bonds boomed.
Something similar happened at the beginning of the last decade. In the seven years between 2011 and 2018, gold lost a third of its purchasing power.
Gold’s reputation as a hedge against inflation is one of those things that keeps repeating itself until everyone just thinks it’s true. It appears to be based on only a few artifacts of history.
First, inflation in America really took off in the 1970s, and so did the price of gold. But one did not necessarily cause the other. Inflation has soared for many reasons, including strong labor unions and two oil crises. Meanwhile, gold flourished as it was finally allowed to float freely in financial markets after being suppressed by the US government for nearly 40 years.
Second, some gold fans recall instances such as the Weimar Republic in Germany in 1923, when paper currency became worthless in the greatest example of hyperinflation in history. Gold held its value against the German mark. Again, so was almost everything—land, a gallon of gasoline, a bottle of whiskey, French francs, and so on.
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The third argument is that gold has been a hedge against inflation for 3,000 years.
In a timely new paper, retired Claude Erb and Duke University finance professor Campbell Harvey point to two popular historical claims. One is that during the time of King Nebuchadnezzar in Babylon 2,500 years ago, an ounce of gold bought 350 loaves of bread. Supposedly buying the same thing now. Another thing is that during the time of Caesar Augustus in the Roman Empire, around the time of the birth of Christ, the annual gold salary of a Roman centurion was about the same as that of an officer in the US Army today.
So, the argument goes, there was a “gold constant” and gold maintained its value during this time.
It makes for a nice story, but none of it can stand up to much scrutiny. When it comes to loaves of bread, can we be sure that something supposedly recorded 2,500 years ago is even accurate? And what kind of loaves did they have then? How big were they? Based on last year’s average gold price, Erb and Harvey say that’s about $8 a loaf today, “or about what an artisan bakery would cost today.”
But these days you can also buy a fake loaf of bread for $2 or even less, so the correct value for an ounce of gold would be $700 or less.
With gold now at $4,100, we will probably have to find loaves of bread at $11.70 to justify the current price of gold. It’s some kind of loaf.
As for the centurion salary: this is just data mining. A comparison of other wages between the time of Augustus and today, measured in gold, shows a very different figure.
Others have argued that in Roman times an ounce of gold was enough to buy a toga, and today it is enough to buy a man’s suit. Not really sure what to make of this nonsense – except to point out that you can spend anywhere from $200 to $5,000 on a suit today. What does this tell us about the value of an ounce of gold?
The chart above also shows that gold is at an all-time high today, even when adjusted for inflation. If it were a stable store of value, its price would not soar, instead of collapsing. But here he jumps into the sky.
Those who argue that gold will double and then double would extend the line on this chart straight up. There is no evidence that it cannot or will not. But how likely does that seem?
And if that were the case, how could gold be a stable store of value?
Simply put, it can’t. If it’s a speculative asset with hot momentum you’re looking for a trade, it’s not a stable store of value. And of course vice versa.
