An often-perceived analysis in the gold community is that gold is the
constant in our global economy. But is this true? Yes and no. Allow me
to share my observations. Although gold has an exceptionally constant nature,
and we have yet to see another currency that can compete with gold’s constant
nature, the reality is, that there is no exact constant in economics. In any
market all goods, assets, currencies, etc. continuously fluctuate in value
relative to each other due to ever changing supply and demand dynamics.
Having said that, in this post we’ll examine gold’s constant nature by
measuring its purchasing power in the short (weeks) medium (years) and long
term (decades). Additionally, we’ll compare our findings to fiat’s nature.
We will find that when gold is officially recognized as the
center of a monetary system – throughout history there have been several
forms of gold standards – gold is
approximately constant in the short, medium and long term. Since the
gold standard has been abandoned, the metal has become less constant in
the short and medium term, but has remained impressively constant in the long
term.
In turn, fiat can have periods of being constant in the short
term, but will always loose value in the medium term and evaporate in the
long term. Thereby, due to fiat’s fragile nature and the current stress in
global finance, there are also risks fiat can significantly devalue
overnight. Hence, gold is highly suitable to secure one’s purchasing power.
When examining the value of gold we have to measure it in terms of goods
and services. In this day and age one might forget the end goal of any
participant in the economy is goods and services. All else traded in our vast
financial system is merely a means to an end. All sorts of money, but also
stocks, bonds, credit default swaps, options, futures, etc., have no use-value
for humans as we can’t eat, drink or wear them. Only goods and services we
can truly use (for more information regarding use-value please read my post The
Concept Of Money.) Therefor, to measure the stability of gold’s value we
have to compute the amount of goods and services gold can buy. For the sake
of simplicity, we’ll use publicly available Consumer Price Index (CPI) and
Wholesale Price Index (WPI) data to measure the value of goods and services.
Gold’s Purchasing Power In The Short And Medium Term
On occasion we can read gold commentators stating that when the price of
gold rises or falls in the short term, it’s actually fiat that is falling or
rising. As, according to this analysis gold is the constant. Let’s test if
this analysis is accurate. In the week from January 4 until January 9, 2016,
the price of gold in British pounds surged 5.9 % from £23,096 pound per Kg to
£24,469 per Kg. We can be quite sure that the price of goods and services in
the UK remained flat during this period. As a consequence, in this example
gold could buy 5.9 % more goods and services at the end of the week, whilst sterling
could buy exactly the same amount of goods and services all week long. So, in
this particular example, what was the constant? The constant was not gold, it
was sterling. The reason is that currently the international monetary
standard is fiat.
![screen-shot-2016-09-28-at-9-45-27-am](http://www.24hgold.com/24hpmdata/articles/img/Koos%20Jansen-How%20Constant%20Is%20Golds%20Purchasing%20Power-2016-09-28-001.png)
Graph created with BullionStar
Charts.
Moving on to the medium term. In the chart below I’ve plotted the
purchasing power index of gold versus the British pound, based on CPI data
and the gold price, from July 2010 until June 2016.
![purchasing-power-index-gold-vs-british-pound](http://www.24hgold.com/24hpmdata/articles/img/Koos%20Jansen-How%20Constant%20Is%20Golds%20Purchasing%20Power-2016-09-28-002.png)
![](../style/all/img/bouton/Zoom_in_6.png)
Over this period we can observe that the British pound was more constant
than gold in the short term, but it’s purchasing power has
been declining in the medium term due to the inherent inflationary
policies by the central bank of the UK. Gold’s purchasing power has been
volatile in the short and medium term, but in this case has remained its
purchasing power over the shown period. Though, it should be clear that if I
would’ve adjusted the period gold’s purchasing power could’ve shown an
increase or decrease.
Gold’s Purchasing Power in the Long Term
To get the best understanding of his subject, let us zoom out and have a
look at gold and the pound’s purchasing power since 1500. The following chart
is conceived by Nick Laird from GCRU,
based on data collected by himself and Roy
Jastram. The chart is perhaps more difficult to interpret than the
previous one. To be clear, we can see 3 index lines:
- The red line reflects gold’s purchasing power index
(1930 = 100)
- The blue line reflects the price of gold index, denominated
in British pounds (1930 =100). Note, until 1914 the blue line was mostly
straight which shows fixed parities between sterling and gold.
- The green line reflects the wholesale (/goods) price
index, denominated in British pounds (1930 = 100)
As you cans see, if the price of gold (blue) transcends wholesale prices
(green), as a consequence gold’s purchasing power (red) is escalated – and
vice versa.
![jastram](http://www.24hgold.com/24hpmdata/articles/img/Koos%20Jansen-How%20Constant%20Is%20Golds%20Purchasing%20Power-2016-09-28-003.png)
Courtesy Nick Laird, from GCRU. Note the scale is logarithmic.
Clearly the red line has remained roughly flat, around 100, for
hundreds of years! This shows gold’s remarkable constant nature. Note,
since the gold standard has been gradually dismantled (1914) gold’s
purchasing power became more volatile but remained robust in the long
term.
Furthermore, we can see that prior to 1914 wholesale prices were also
fairly constant but this is due to the fact sterling was tied to gold during
this era. Since the gold standard was abandoned step-by-step from 1914
onwards, the blue and the green line have skyrocketed, evaporating the
purchasing power of sterling. Since 1971 the British pound has lost over 93 %
of its purchasing power – in 1975 inflation topped 20 %.
We can conclude, while there is no exact constant in economics,
the stability of gold’s purchasing power is unprecedented. Not only
on a gold standard the metal shows it’s constant nature, but also off the
gold standard gold’s purchasing power is remarkably constant, albeit more
volatile in the short term.
For the future, if the current fiat international monetary system will
breach its limits and has to be re-anchored to gold, I expect gold to become
more constant in both the short and medium term when providing a center
pillar in finance.