House prices: countries with the cheapest and most expensive property markets
Gold Is Not Stable After All
I like gold. My wedding ring is simple but classy. My crowns in my
mouth are so good that I forget they are there. The electronic contacts
in my computer work just fine. Gold is great. But not as a steady
measure of purchasing power, nor as a guaranteed investment.
“Gold has the same purchasing power today that it had in 1913,” I
continue to read. So let’s look at the data and see what we can conclude
about gold, its stability and purchasing power, and then we’ll turn to
gold as an investment.
To get an idea of the purchasing power of an ounce of gold, we’ll
adjust the gold price by the Consumer Price Index. (I’ve noted elsewhere
that Long-term Inflation
estimates are misleading, but they are what we’ve got. Just keep in
mind that your purchasing power has risen more than the CPI indicates.)The chart shows a fairly steady price of gold for most of our history,
followed by two giant spikes. We’ll get to the spikes later, but let’s
narrow in on the seemingly steady period. It turns out that the era
from 1800 through 1972 looks steady because those spikes require the
chart’s vertical axis to be up at $2000.
If you had bought gold in 1800, you would have increased your
purchasing power by 13 percent in five years. That’s not quite a stable
measure of purchasing power, but given the accuracy of our price
statistics, it’s in the ballpark. As an investment however, note that 13
percent over five years is lousy when interest rates are six to seven
percent per year, as they were back then.
Pity, though, the person who bought gold in 1805. In nine years, his
gold had lost 26 percent of its purchasing power. Gold was neither a
stable measure of value nor a good investment.
The next few decades were good for gold owners. The gold price was
steady while consumer prices fell. From the 1814 low until the start of
the Civil War, the purchasing power of an ounce of gold more than
The inflationary years of the Civil War showed gold’s value in a time
of crisis. Consumer prices rose 74 percent from 1861 through 1864, but
the price of gold doubled.
Now let’s fast forward to the two spikes in the gold price series. In
1980, gold averaged $613 an ounce, though on the best day it traded at
$850. By 1982 gold was trading the low $300s. It turns out that the
Federal Reserve got serious about fighting inflation just as investors
got serious about using gold to hedge against inflation. Ouch.
Then we had another run-up in 2011-12, with gold hitting a daily high
of $1,781. As I am writing, May 15, 2014, gold is trading at just under
$1,300, off 27 percent from its peak of a few years ago.
Instead of belaboring the data, let’s just say that gold’s value goes
up and down. It is not a steady measure of value or purchasing power.
Like all other assets, its value is not intrinsic; it has value only as
people are willing and able to pay for it. That willingness and ability
come and go, and thus gold’s value will rise and fall in the future.
Just to make it shorter :
==============Economic Calendar events to watch this week
The economic calendar for upcoming week is less busy after last week saw
several key economic data releases. The main events this week are the
publication of the minutes of the Federal Reserve’s April meeting and
data on U.S. home sales. Economy watchers will also be focusing on
manufacturing data from China and the euro zone. Here are some key
events to watch:
Federal Reserve minutes
The Fed is to publish the minutes from its April 29-30 meeting on
Wednesday. There was no press conference after the most recent monetary
policy meeting, and the rate statement was by and large unchanged from
the previous release. The minutes are expected to indicate that the
unwinding of the bank’s stimulus program will proceed on its current
Fed Chair Janet Yellen is to deliver the commencement address at New
York University on Wednesday. Other Fed speakers this week include
Richard Fischer (Dallas) on Monday, Charles Plosser (Philadelphia) and
William Dudley (New York) on Tuesday, Narayana Kocherlakota
(Minneapolis) and Dudley again on Wednesday; and Williams again on
Global manufacturing data
China is to publish the preliminary reading of the HSBC manufacturing
PMI on Thursday while the euro zone is also to publish its manufacturing
PMI. The HSBC Chinese manufacturing PMI has remained in contraction
territory since December 2013, fuelling fears over a slowdown in the
world’s second largest economy. Economy watchers are expecting an uptick
to 48.4 this month from 48.1 in April. The euro zone manufacturing
index is expected to pull back slightly from last month’s three-year
US home sales
The U.S. is to release data on existing home sales on Thursday and a
report on new home sales on Friday. Market expectations are for a
pick-up in sales of both new and existing homes, while weak numbers
would point to underlying weakness in the sector.
Bank of Japan monetary policy announcement
The BoJ is to announce its benchmark interest rate and publish its
monetary policy statement on Wednesday. The BoJ will now have data on
the impact of last month’s sales tax increase on the economy, which
could prompt further monetary policy action by the bank.