Justification for Gold

Justification for gold to move substantially higher in price continues to press the boundaries of imagination. In this article we will try to filter the noise in the headlines and also simplify what has been marketed as something much more complex.

Fundamentally, there is only one basic reason to own gold – to protect and preserve wealth; but, why should that be the case? Seemingly, there must be some “value” associated with gold ownership that justifies holding it. There is, and there is historical precedent to help explain that value and its applicability to us today.

Lots of things have been used as money during five thousand years of recorded history. Only gold has stood the test of time. Gold’s role as money was brought about by its practical and convenient use over time. Gold’s value is in its use as money. (see Gold Is Real Money)

Recent history clarifies this principle and helps us understand its relevancy today…

“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 and vice-versa. The coins were minted by the U.S. government. Gold in other forms (dust, flakes, nuggets, etc) also circulated as money at the same ratio of twenty dollars to the ounce once its purity and weight was established.

Fast forward one hundred years. The U.S. dollar has lost 99% of its purchasing power over the last century. In other words, it takes one hundred 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.” (source)

(Any reference to ‘gold’ in this article means the actual physical metal.)

UNDERSTANDING PRICE VS. VALUE 

Now that we have established the value of gold ownership and illustrated its applicability, we can talk about gold’s price. The price of gold is unrelated to its value. The only reason the price of gold increases over time is to reflect the actual loss of purchasing power in the U.S. dollar.

We spoke earlier about the dollar’s ninety-nine percent loss of purchasing power. The reason that an “ounce of gold will still buy today what it would a hundred years ago”  is because its price in dollars has risen to offset the corresponding loss of purchasing power in the U.S. dollar. As a matter of fact, the gold price on January  2, 2024 touched $2064 oz., almost exactly one hundred times higher than its original U.S. dollar price of $20.67.

The one-hundred fold increase in the gold price tells us nothing about gold or its value. It tells us only what has happened to the U.S. dollar (see  Price Of Gold Is Not About Gold). This means that the gold price will not go significantly higher until after the U.S. dollar loses additional purchasing power of significant magnitude. 

GOLD IS NOT AN INVESTMENT 

Since the price of gold has risen one-hundred fold it might sound like it would have been a good investment. For something to be considered an investment, though, it must present the possibility of gaining in value; meaning its price must exceed the effects of inflation.

Referring back to our explanation about a higher gold price and the loss of U.S. dollar purchasing power, the fact of the matter is that even though the gold price has risen one-hundred fold, gold’s value (and its purchasing power) remains unchanged. On the other hand, if you held U.S. dollars, you would have lost ninety-nine percent of their value/purchasing power.

Over the same time period (100+ years), stocks increased seven-hundred fold. The return for stocks represents an increase in value and is seven times greater than one-hundred fold increase in gold. Stocks are an investment; gold is not.

CONCLUSION

The case for gold is not about gold. It is about the U.S. dollar and all fiat currencies.

As long as the Fed continues to expand the supply of money and credit, the effects of inflation will lead to further losses of U.S. dollar purchasing power. Those losses will eventually show up in a higher gold price afterwards, but not before.

The more severe the loss of U.S. dollar purchasing power is, then the higher the gold price will rise to reflect that loss. The resultant higher gold price does not represent profits, though. That may sound illogical to you. If so, please reread the previous two paragraphs.

If you want to have a portion of your dollars (or any other fiat/paper currency) in something that maintains its value over centuries, then gold is an excellent choice. As we said at the beginning of this article, there is only one basic reason to own gold: to protect and preserve wealth. (Also see: Both Gold And Silver Peaked In 1980).