Why we should ignore the gold price charts

New research from The Real Asset Company shows that when it comes to gold, everyone’s been looking at the wrong data. Rather than looking at the price of gold (which has climbed for the last 12 years); we should be looking at the value of the currencies we’re buying it in.

The Real Asset Company, an online physical gold investment service, sees the most interest in gold investment when the gold price is climbing. The majority of people investing see the price go up and rush to get in quick before it jumps up any higher; believing the price increase shows gold is worth an increasing amount of money.

But it’s not, the currency you’re buying in is just becoming more worthless – you need more of it to buy the same gold ounce which you would have bought for a few hundred dollars a few years ago.

In contrast, the value of the gold remains the same, whether you spend with it today or 500 years ago.

Rather than look at the usual graph of the gold price increasing, the graph we should all be looking at is the one below.

The graph shows a clear fall in the value of currencies when priced in one gold troy ounce. For the purpose of this research we have just taken the last 12 years as an example, however if you take it back to 1971 then the devaluation of our currencies is far worse.

To reiterate the British Pound, the US Dollar etc. are the moneys you earn and save in. If you have been saving for the last twelve years your money is now worth 80-90% less than it was in 2000.

Had you been paid, or saved, in gold you would still have the exact same amount you received in 2000. Not less, as you find with currencies.

Whilst to some it may seem scary that I’ve just told you gold’s price isn’t what you see, you should look at it another way – gold is the constant amongst all this.

More money moves to gold

The correlation between the gold price and the amount of currency in circulation is one which is often referred to as evidence of gold’s continued price escalation. We are all aware of central banks expanding their monetary bases, first covertly before the financial crisis and now quite openly as they are encouraged by governments to do so through quantitative easing.

As we all know from basic economics, the more there is of something the less it’s worth; its value decreases. And when government led currencies are priced in true money – gold – then it is clear how much value it is losing.

Why price it in gold?

Gold has been money for 6,000 years, its price has been rising ever since but its value remains the same. Throughout history we have used gold and silver as money, always returning to it after financial crises such as we see today.

As more countries prepare to repatriate their gold from foreign custodians and as increasing numbers of non-Western nations trade in gold, memories of the precious metal as money are being refreshed.

Increasing numbers of people and central banks are looking to hold their wealth in gold, not currencies.

We usually price gold in a number of currencies – most often the US dollar, but here at The Real Asset Co we sell gold in GBP and EUR as well.

All three are in financial difficulties; all three are using some kind of monetary policy measures to manipulate their way out of the crisis, and to erode the stability and strength of the currency.

Elsewhere the Chinese are accused of being currency manipulators, Japan are gawped at as they print to oblivion, Canada are admired because of their impressive economy and India complains about the high gold price.

But all of them, no matter their policies or global views of them, are seeing their currencies become hugely devalued against the international, faceless currency that is gold.

Will they recover?

Those of us interested in gold are big fans of referring to the fundamentals which drive gold. The main fundamental shown here is what we refer to as the ‘race to debase’ i.e. moves by central bankers to implement policies which devalue our currencies such as quantitative easing.

Unless you can find evidence that central banks plan to stop further expansion of the money supply then gold’s price will keep rising and the value of currencies will keep falling.

The ‘race-to-debase’ is clearly alive and well amongst the currency managers and central bankers of the world.

When you next hear about high or rising gold prices, just think what that means for your national currency and how to store your wealth in gold.

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