The gleaming luster of gold has captivated humankind's imagination throughout history. Humans' use of this rare, precious metal has evolved from making jewelry and ornaments to using gold as currency and a hedge against inflation. The strength of gold's buying power over time is a source of discussion and controversy.
A Fine Suit of Clothes or the Emperor's New Clothes?
Perhaps the most often repeated quote about the buying power of gold over time is the adage, "With an ounce of gold a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, in the Depression of the 1930s.” Believers in gold often quote this line as proof of gold's consistent buying power. However, skeptics point out that a "fine suit of clothes" can vary from a few hundred dollars for a designer suit at the mall to a few thousand dollars for a bespoke three-piece suit. Skeptics say the price of a "fine suit of clothes" is too imprecise to use as a standard for valuing a precious metal.
Un-setting the Standard
The adoption and abandonment of gold as an economic standard for the U.S. dollar affected gold's historic value and, therefore, its buying power. In the 19th century, European nations and the United States could not print currency unless it was backed by gold reserves, and the value of currency directly correlated to an amount of gold. However, by the end of World War I, the United States was the only country maintaining the gold standard. With the rest of the world holding currency instead of gold, the United States dropped the gold standard in the early 1970s to avoid devaluing the dollar. The value of gold has not been tied to currency since then.
Gold Index vs. Consumer Price Index
One way to measure gold's buying power over time is to compare it to the Consumer Price Index, which measures the average price of consumer goods over time. Both gold and the CPI remained relatively stable between 1913 and 1970. However, the CPI climbed steadily between 1962 and 2013. The gold index exceeded the CPI between 1978 and the mid-1990s, but its buying power has varied since then, spiking and dipping instead of growing steadily.
Gold Index vs. S&P 500 Index
Another way to measure the incremental purchasing power of gold is to use Standard & Poor's index of the 500 leading publicly traded companies in the United States. According to an analysis published by SeekingAlpha.com, gold had its lowest measured value compared to stocks at the peak of the dot-com bubble in 2001, when it would have taken 5 ounces of gold to buy a "unit" of the S&P 500. However, in the years after the bubble burst, you could buy a unit of the S&P for less than 1 ounce of gold. On average since 1971, 1.5 ounces of gold has been equivalent to one unit of stock. Other than the anomalous drop in 2001, the gold-to-stock ratio has remained relatively stable over the last 40 years.
- SEC: SPDR GLD Gold Shares
- SeekingAlpha.com: The Buying Power of Gold
- Data360.org: Gold CPI
- The National Archives. "Going Off Gold." Accessed Sept. 24, 2020.
- Congressional Research Service. "Brief History of the Gold Standard in the United States," Summary. Accessed Sept. 25, 2020.
- United States Government. "An Act to Provide Relief in the Existing National Emergency in Banking, and for Other Purposes," Page 2. Accessed Sept. 24, 2020.
- Peter Bernstein. "The Power of Gold: The History of Obsession," Page 3. John Wiley & Sons, 2000.
- U.S. Senate. "Constitution of the United States." Accessed Sept. 24, 2020.
- Congressional Research Service. "Brief History of the Gold Standard in the United States," Page 1-18. Accessed Sept. 24, 2020.
- V. S. Somanath. "International Financial Management," Page 53. Accessed Sept. 24, 2020.
- Congressional Research Service. "Brief History of the Gold Standard in the United States," Page 2. Accessed Sept. 24, 2020.
- Allan L. Meltzer. "A History of the Federal Reserve, Volume 1: 1913–1951," Page 11. University of Chicago Press, 2003.
Marilyn Lindblad practices law on the west coast of the United States. She has been a freelance writer since 2007. Her work has appeared on various websites. Lindblad received her Juris Doctor from Lewis and Clark Law School.