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Gold Keeps Its Value

07/30/2009 1:00 pm EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts & Strategies, says a study of gold prices shows the yellow metal holds its value over centuries, and lately it’s been a great inflation beater.

In 1977, I earned my PhD in monetary economics with a dissertation: “Economics of a Pure Gold Standard” (later published by the Foundation for Economic Freedom (FEE) and available on Amazon).

While researching my dissertation, I came across a classic work, “The Golden Constant,” by UC Berkeley professor Ray Jastram. Using wholesale prices in the United States and the United Kingdom, Professor Jastram reviewed the purchasing power of gold over four hundred years, between 1560 and 1976, and concluded that “its purchasing power in the middle of the 20th century was very nearly the same as in the midst of the 17th Century.”

Nevertheless, Jastram concluded that gold was a poor hedge against inflation in the short run, while a good hedge against major deflations. The reason? Gold was then fixed in price, either [against] the dollar or the British pound.

Jastram’s research ended in 1976, and therefore he barely foresaw the impact of a new era, when gold was de-linked from the dollar and other currencies and became free floating for the first time in centuries.

Now, I’m pleased to see that Jastram’s classic study has been updated through 2007 by the World Gold Council, with an introduction by Pierre Lassonde, chairman of Franco-Nevada. The newly revised second edition is called, “The Golden Constant: The English and American Experience, 1760-2007” (Edward Elgar, 2009, $140, but available on Amazon for $110).

The new editors, led by Jill Leyland, made an important discovery in updating Jastram’s work. In reviewing the past 50 years, they confirm that gold is still a “constant,” and maintains its purchasing power over the long run.

But more importantly, the World Gold Council demonstrated that gold moves just the opposite of what it used to do. Now, the price of gold goes up when inflation goes up, and falls when inflation falls or deflation hits.

Even more importantly, gold is now a superior inflation hedge. It performs better than the underlying rise in the consumer price index. Gold is an inflation beater!

Since the early 1970s, the purchasing power of gold [has been] volatile throughout, but the long-term value remains virtually the same over 100-year periods—at least until 1971.

In 1971, when gold was de-linked and set free to fluctuate against the dollar, the pound, and other currencies, it broke out above its long-term purchasing power. It’s now a profitable commodity.

I like to use a $20 St. Gaudens Double Eagle as an example. In the 1920s, you could buy a really nice, tailor-made suit with a $20 gold piece. Today, you still could buy a really nice, tailor-made suit with a $20 gold piece (now worth more than $1,000). Maybe you could buy two suits!

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