By Nicholas Colas
The continued rally in gold and the ongoing turmoil in currency markets got us thinking about gold as money. Yes, we know that this is a role the yellow metal has played throughout history, but what can you really get for an ounce of gold today? Enough gasoline to drive 9,000 miles, to give one example. Or if you aren’t driving, how about two cases of Ketel One? If you are feeling practical, one ounce will comfortably feed a family of four for over a month.
Where this analysis gets really interesting is when you look at a time series of gold versus various asset types (financial, commodity and real estate) to see the long term trends in gold’s purchasing power. An ounce of gold used to only buy 10 shares of the XLF financial sector exchange traded fund; now it buys 86 shares. As for where gold’s run might end—or at least take a breather—consider that measured from its old peak price back in 1980, gold still lags both food and fuel inflation since then despite its historical ability to match long run inflation. To get back to its old $850 high on a food-and-gas inflation adjusted basis would put gold at $2,000.
There is a t-shirt popular in some parts of the U.S. that reads “Alcohol, Tobacco and Firearms…But Who’s Bringing the Chips?”—a not-so-subtle play on the name of a Federal law enforcement bureau. I was reminded of this bit of Americana when pondering the recent rally in precious metals and what you can get for an ounce of silver or gold.
The exact genesis of the thought was an offer from a buddy to buy some cigars with him online. For some reason the conversation about the cost—$150/box for really good smokes—moved off into a hypothetical discussion about whether he would take a tenth of an ounce of gold or seven one ounce silver coins in trade. The U.S. Mint, conveniently, produces both items so it is not especially hard to find either one. And even though the value is all the same at current prices, I found myself much more willing to consider paying $150 in cash rather than parting with a gold or silver coin.
There is an old aphorism among gold bugs that an ounce of gold has always bought a nice men’s suite and that this equivalency goes back to Roman times. That linkage is supposed to capture some immutable truth about gold as money, which is fine. The price of gold in my lifetime has swung between Hickey Freeman and Moe Ginsburg, however, so I spent a little time yesterday thinking about what $1,373 (the closing price for gold in New York) might buy. Here are some examples:
• A year’s worth of Starbucks coffee. A nice cup – a latte, or something with caramel – that costs $3.75 or less. Every day.
• Enough gas to drive 9,000 miles in the average new car or light truck. That’s the distance from Alaska to the tip of South America.
• Two prime tickets to the “Iron Bowl” football game between Auburn and Alabama. OK – that one came from Beth, who hails from Alabama. College football is a big deal in the South, she tells me.
• Just over 200 bushels of corn, another commodity in the news of late. Beth also tells me a bushel of shelled corn is 56 pounds. Corn is apparently also big in the South.
• Two cases of Ketel One (plus a bottle or two), or one case of Macallan 18 year old scotch.
• For the shooting enthusiasts who might be reading this, you probably know that an ounce of gold buys one new AR-15 rifle (the civilian version of the U.S. military’s M-16) and that this one-to-one relationship has been pretty stable for ten years. It also buys about 4,000 rounds for the same. Trust me. It does.
Where this calculus gets really interesting, however, is when you look at the historical relationship of gold prices to various real and financial assets. This is especially trenchant in the current environment, where the weakness in the dollar has put a strong wind in gold’s sails.
For example, the ratio of the price of an ounce of gold to a barrel of oil has been remarkably stable since even before the first oil shock in 1973. As the attached chart highlights, one ounce of gold bought about 12 barrels of oil in 1960, and the same in the 1980s and the same in the last decade. Spikes occur in the relationship, either because gold rips or oil falls. At the current ratio of 16, gold and oil prices look to be in pretty fair balance.
In contrast, the number of shares of the XLF financial services sector ETF that an ounce of gold can buy has swung sharply since the introduction of the fund in the 1990s. For years you could only buy about 10 shares of the ETF that owns the stock market’s largest and most influential investment banks, commercial banks, and regional financial companies. Now you can get almost a round 100 lot for the same one ounce gold coin. This does beg the question: would you make that trade here?
Turning this calculus on its head, consider how many ounces of gold it would take to buy the average house in the U.S. During the housing bubble it was 450-500 ounces. That is about 83 pounds. Now, you could get yourself a nice place for less than 25 pounds of the yellow metal. Is there an inherently correct ratio for this statistic? Doubtful. But picture showing up at a closing with either +80 pounds of gold or 25 pounds; that is a good way to think about how both housing prices and the dollar have taken it on the chin in recent years.
Gold does have a history of price volatility, of course, so it is important to put those gyrations in context. The prior peak for the metal was $850 in 1980. In the months after that, then Fed Chairman Paul Volker’s war against inflation kicked into high gear and prices swooned, down 40% in just a few months. In the accompanying graphs we compare the price of gold to the Consumer Price Index-measured inflation rates for food and gasoline from that 1980 peak until now. Naturally, since we are benchmarking against gold’s all time high, there has been a bit of a lag in gold’s ability to hedge the inflation of these two components of consumer prices.
If you want the current price of gold that gets us “back” to the prior peak of $850 relative to food and gasoline inflation, it is $2,000-$2,045. That is not meant to be a forecast, but rather an evaluation of “peak to peak” relative value.
The point here is that as gold rallies on the back of persistent dollar weakness it gathers more mindshare—and credibility—as a point of comparison to paper money. Are you going to walk into your liquor store and exchange a 1 ounce gold coin in return for some Scotch, or hand one over at the ticket booth for a football game? Probably not. But, like my putative cigar/gold trade, it may be because you want to hold on to those gold pieces. Paper dollars will do quite nicely for now.
Nicholas Colas is chief market strategist for ConvergEx Group, a financial technology provider headquartered in New York. This column was adapted from his October 14 “Morning Markets Briefing.”