If gold was the currency...

Pigs would fly.

Interesting brain teaser in the short view by John Authers (FT)

What if gold, close to $1,000 per ounce, is the only true global currency? If we believe that, then it says something interesting about the price of US houses – another asset that can claim to be a store of value.

In gold terms, US houses have never been as expensive as they were at the beginning of the 1970s when the median house cost more than 700oz gold, according to Tim Lee, of Pi Economics. But they nearly regained that peak in 2001. Their decline since then – even as their prices in dollar terms have gone through the roof – has been precipitous. A US house would now cost you only 220oz of gold. Over history, this price has tended to revert to an mean of about 350oz.

So, if disparate markets are put together, the US financial industry has lost more than half its value and US housing more than two-thirds of its value since 2001.

Either the US is on course for disaster or the moves on these markets are overdone.

Since we only deal in FIAT money and no currency is pegged to gold, gold is NOT a currency. At best gold is an asset class, like any other commodity (wheat, oil), or any other asset class (stock, bonds, options).

Therefore what the analogy is really saying is: gold is a bubble housing is depressed. if you compare the price of houses or financials to the price of a commodity that has run-up lately (say corn) then the houses look cheap, compared to a year ago.... a depressed asset is cheap compared to a bubbled asset. But since you are not holding your currency in gold, it is useless to make the comparison, unless, well... you own gold.

Therefore the alarmist conclusion doesn't hold in my view. Nonetheless a nice little brain teaser!

Comments

Andrew Meyer said…
Maison,

it's not really a brain teaser. In the investment world, all that really counts is the comparables. If I earn 10% interest on an investment and inflation is 11%, the investment sucks, if inflation is only 2%, then maybe the investment was good and I can feel proud of myself. The only problem is if I sit next to you on an airplane and you tell me that you earn 14%, then my 10% doesn't look so good.

By comparison, gold is a great investment and houses are a terrible investment. BTW, there are well regarded analysts (Marc Faber) who predict that gold will hit $3,000 on ounce before it peaks.

When/if that happens, you don't want to compare your US dollar priced house to gold...

Andy
Andy
adt43wt342 said…
Andrew,

thanks for the Marc Faber tip. My main beef with the article is that it concludes that "houses and financial are cheap in the gold currency".

I think housing and financials have some way to go, no?
Anonymous said…
Gold is not currency. Gold is the oldest universal form of money. We got away from that over the past 37 years (1971, well since 1933 really) in the USA thinking we are "smarter". We are going to learn what we were supposed to have learned in the 1970s and what others have learned throughout history. Fiat currencies usually fail under stress or at least devalue when not backed up with productive economic activity and or assets.

Oil/energy costs, supply and availability will be a driver of the value of gold as money. So will faith or lack thereof in the US ability to manage its fiscal affairs. This time, there are no new Alaska nor North Sea mega oil fields to save us...like in the 1980s.

Also, Bernarke is not Volcker.

Houses are not cheap in the USA...especially those far from major employment. Those in particular have a long way to go down.
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