Saturday , 3 December 2016


The U.S. Dollar vs. Gold: Which Is the Best Store of Value?

Whether intuitively or analytically, we all know that the dollar is not Gold-bars-on-100-and-50-dollar-billsuch a great form of money. That’s putting it mildly though. The dollar is a terrible form of money…We think gold is the best money. In fact, here is why you should leave dollar-thinking behind and start thinking in gold terms.

An article (original) by Dickson Buchanan Jr., (SchiffGold.com) which has been slightly edited ([ ]) and abridged (…) to provide a faster and easier read.

Money is commonly and inadequately defined as the “common medium of exchange” but, where the rubber meets the road, this definition doesn’t tell us anything about whether the common medium of exchange is a good one or bad one. By good or bad we mean whether it helps or harms human flourishing and civilization. Economic planning is necessary for human flourishing and civilization. Planning in a good form of money as opposed to a bad one makes a big difference.

Carl Menger, often dubbed the father of the Austrian School of Economics, preferred to define money in terms of its “saleability” or “marketability” relative to other economic goods. Marketability refers to the relative ease that particular good could be used in a market exchange. There is always a cost to bring and exchange products at market. Therefore, we can say that the most marketable economic good was the one that permitted mutually beneficial exchange at the lowest possible cost. The most marketable good in any economy eventually becomes money.

It is important in Menger’s paradigm to remember that marketability precedes becoming the common medium of exchange. The “money-good” only becomes the most common medium of exchange because more and more people wake up to the fact that it works better than what they were using before. It makes it easier to execute more effective economic planning that is more seamless, precise, and accurate.

In addition to its characteristics or properties (durability, divisibility, portability, sufficient supply, uniformity, recognizability, history or store of value, etc.), money has the following three functions:

  1. Store of value
  2. Unit of account
  3. Means of exchange

We would like to add a fourth function, which is the “ultimate extinguisher of debts.” Gold gladly and easily performs this function, but the dollar, sadly, cannot…

The United States dollar is certainly very marketable today. US dollars are demanded not only all across our domestic economy, but all across the globe…Over short periods of time, the dollar holds up very well as a means of exchange and a store of value. However, if we zoom out a little bit, we see that the dollar begins to break down as a store of value.

To illustrate this point, let’s take a look at some charts showing the gold price of the dollar in milligrams (mg) of gold over various time frames. Yes, that’s right, not the dollar price of gold, but the gold price of the dollar. It’s an important distinction to make.

[The first is a 200+ year chart and the reality couldn’t be clearer. There have been some bumps along the way, but this is about as close to falling off a cliff as it comes.

usd-in-gold-200+-years

If you are planning to store value across generations (something that used to happen in this country with some frequency), then the dollar is not going to get you the goods (pun very much intended).

Let’s zoom back in to around a ten year time frame to see if the dollar does any better against gold there.

usd-in-gold-1997

Ouch. That’s close to an 80% decline in a little over thirteen years. That comes to about a 6% capital erosion year over year. Unfortunately, this implies the dollar isn’t even suitable for planning ten years out.

When is it economically safe to use the dollar as a store of value? It’s not such a clear call. Since late 2012, the dollar, priced in gold, had risen. Holding dollars starting in 2013 has been a pretty good play, although the backdrop of history paints a very risky picture. Suffice to say, dollars do not score well in communicating value across time, especially over longer stretching timelines.

Making the transition from “store of value” to “unit of account” would seem to be a pretty natural transition. If the dollar is not a good store of value over time, then why use it as a unit of account? Unit of account refers back to the French word numeraire. Going deeper, numeraire is defined as “a basic standard by which value is computed.” Accounting and the units of account utilized only work if they accurately and precisely report back to us a snapshot of where value is.

The heart of the issue is that the dollar does not accurately or precisely measure or account for value. Perhaps it does so on a short term basis. But over time it starts to break down. The breakdown is significant for anyone who wants to save for more than a couple of months at a time. A different and better unit of account is necessary. Namely, one that accurately reflects the current state of value exchange as it occurs over time. We suggest gold.

How can you start thinking in gold terms again? Here is one simple and practical suggestion:

  • Start calculating and measuring your net worth in gold.
    • On a quarterly basis, calculate your net worth in dollars and then divide that number by the current dollar gold price. This will give you, approximately, your net worth in ounces of gold.
  • If the number of ounces is increasing every quarter then you can rest assured your net worth is increasing in value.

However, we recommend converting some of those dollars into real physical ounces at some point. Otherwise you run the risk of your net worth increasing in bad money (dollars) while it’s decreasing in good money (gold ounces). This would end up, of course, as a net decrease in real value, which dollar-thinkers would be completely oblivious to. This is also why we prefer to measure the dollar (and other currencies) in gold and not the other way around. It shows us where the true volatility lies – in fiat currencies, not in gold.

Conclusion

Have you ever heard the statement, perspective is everything? Well with money, it’s no different. Looking through the foggy lens of dollar money you will get a distorted and unclear vision of the world and its affairs. Walking through life with foggy dollar lenses could lead to a very bumpy ride. Looking through the lens of gold, however, will bring precision and clarity…

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