One of the earliest articles I wrote was “A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold”. The information contained in the article is basic to a fundamental and accurate understanding of gold.
The convolution and complication of basic fundamentals reigns supreme in almost all analysis of gold. That is unfortunate, because it obscures the simple truth.
The simple truth is that gold is real money. Even that simple truth, however, deserves some further explanation.
We know that there are certain attributes, or characteristics, of money. The two that are more commonly cited are 1) a medium of exchange and 2) a measure of value. But what is required of something in order for it to deserve the moniker of ‘real’ money?
In order for anything to be termed real money, it must be something else in addition to the above mentioned medium of exchange and measure of value.
That something else is a store of value: “A store of value is an asset that maintains its value without depreciating.”
The best and most relevant example to illustrate gold’s role as a store of value is as follows:
The Federal Reserve Bank of the United States was established in 1913. At that time the U.S. dollar was fully convertible into gold at a rate of twenty ($20.67) dollars to the ounce. You could exchange paper currency of twenty dollars for one ounce of gold in coin form. The coins were minted by the U.S. government.
Fast forward one hundred years. The U.S. dollar has lost 98% of its purchasing power over the past century. In other words, it takes more than fifty times as many dollars to buy today what one dollar would buy a hundred years ago. Whereas one ounce of gold will still buy today what it would a hundred years ago.
Only if something meets the requirements of all three specific things – medium of exchange, measure of value, store of value – can it be real money. Anything can be real money if it meets these three requirements, however, throughout all of recorded history, only gold has passed the test.
The average cost for a loaf of bread in 1930 was close to ten cents ($.10). The average cost for a gallon of gasoline was also ten cents. (see below)
Average Cost Gallon Of Gas
1930 10 cents , 1940 11 cents , 1950 18 cents , 1960 25 cents ,
1970 36 cents , 1980 $1.19 , 1990 $1.34 , 2009 $2.051
Average Cost Loaf of Bread Food
1930 9 cents , 1940 10 cents , 1950 12 cents , 1960 22 cents ,
1970 25 cents , 1980 50 cents , 1990 70 cents , 2008 $2.79
With gold priced in U.S. dollars at twenty dollars per ounce, you could at that time purchase two hundred loaves of bread or two hundred gallons of gasoline (or some combination thereof).
Twenty U.S. dollars of paper currency OR one ounce of gold, usually in the form of a U.S. Double Eagle ($20.00 gold coin, legal tender), were equal in purchasing power.
Over the next four decades the cost for a loaf of bread/gallon of gasoline continued to increase such that in 1970 the respective costs were twenty-five cents/thirty-six cents. An ounce of gold at $40.00 would purchase one hundred sixty loaves of bread/one hundred eleven gallons of gasoline. That is considerably less than the two hundred units of either item which could have been purchased in 1930. But the numbers are even worse when we look at what twenty dollars of U.S. paper currency would buy in 1970: eighty loaves of bread/fifty-five gallons of gasoline. Both gold and the U.S. dollar lost purchasing power over the forty-year period 1930-70 but the U.S. dollar was the “biggest loser”.
By 1980 the average cost of a loaf of bread was $.50 and the average cost of a gallon of gasoline had settled out at $1.19. One ounce of gold ($615.00 per ounce) would purchase twelve hundred thirty loaves of bread or five hundred sixteen gallons of gasoline. Whereas, twenty dollars in U.S. paper currency would buy only forty loaves of bread/seventeen gallons of gasoline.
Ten years later, in 1990, a loaf of bread had increased to $.70 and a gallon of gasoline to $1.34. With gold at $338.00 per ounce you could purchase four hundred eighty-two loaves of bread/two hundred fifty-two gallons of gasoline. Twenty U.S. dollars would buy twenty-eight loaves of bread/fifteen gallons of gasoline.
The average cost of a loaf of bread and a gallon of gasoline today are approximately the same – about $2.90. An ounce of gold at $1200.00 can purchase four hundred thirteen loaves of bread or four hundred thirteen gallons of gasoline. This is more than double the amount you could have purchased with one ounce of gold in 1930.
And twenty dollars in U.S. currency will purchase only seven loaves of bread or seven gallons of gasoline which is more than ninety-six percent LESS than the amount you could have purchased with twenty dollars in U.S. currency in 1930.
The continual, ever-increasing prices of all goods and services is symptomatic of a currency with a terminal illness. The U.S. dollar (and all paper currencies) are substitutes for real money. As such, they are doomed to eventual destruction.
The purpose in my original article “A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold” was to illustrate the inherent and inevitable decline of money “substitutes”. In this case, more specifically, that means the U.S. dollar.
Those who continue to analyze changes in the price of gold need to change their focus and redirect their efforts.
The focus, by definition, is the U.S. dollar. Changes in the price of gold are a reflection of changes in the value (actual and perceived) of the U.S. dollar.
Those who continue to base expectations and decisions on the faulty analysis of gold that is prevalent today are hurting themselves needlessly.
Maybe its time to get a second opinion. (contact me here)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!