Does Gold Really Preserve Purchasing Power? The Case of The High-End Suit
The comments below are an edited and abridged synopsis of an article by Michael Maharrey
One of the characteristics of gold is that it preserves wealth in a world of constantly devaluing fiat currency. Put another way, it preserves your purchasing power over time.
Dollars will buy less at the end of a few years than they did at the beginning. This is especially true in the case of rapidly rising prices. Even when inflation is under control, Fed policy is to devalue the dollar by 2% every year. It simply doesn’t make sense to hold onto dollars for any length of time. This is demonstrated in a tangible way by pricing a good or service in gold and examining the change in price over time.
Consider a high-end men’s suit. In 1900, the average price of such a suit was around $35. At the time, the price of gold was set at $20.67 per ounce. That means the suit, priced in gold, would have cost around 1.7 ounces of gold.
Today, the average price of a high-end suit is around $2,000. Prices vary depending on brand, region and other factors, but this is a fair average. At the time of writing, gold was around $1,840 an ounce, and Maharrey uses $1,800 for this calculation to keep it simple, so a high-end suit priced in gold today costs a little over 1.1 ounces of gold.
The price of a suit in gold has dropped a little over 35% since 1900. This is what you would expect given advances in technology and productivity. But, priced in dollars, the cost of a high-end men’s suit has increased by 5,614.3%.
Looking at it another way, if you had put $41.34 under your mattress in 1900, today you might be able to buy a couple of Polo shirts if you find a deal. But if you had put two 1-ounce gold coins under your mattress in 1900, today you’d be able to buy a fancy suit and have about $1,600 left over.
Of course, the gold price fluctuates by the day, month and year. In some years, it even falls. But over time, it has historically maintained its purchasing power even as fiat currencies lose buying power year after year.
Added to the fact that it carries no counterparty risk, gold is an excellent way to safely preserve wealth and mitigate risk in your portfolio.
