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Start Thinking in Terms of Gold Price (Currency Dilution is Coming)
Casey Research via Zero Hedge ^ | 12/07/2011 | Jeff Clark

Posted on 12/07/2011 5:21:08 PM PST by SeekAndFind

Submitted by Jeff Clark of Casey Research

Start Thinking in Terms of Gold Price

A young woman – let's call her Andrea – inherited some money from her father in late 1997. She was only nineteen at the time. Not knowing the first thing about investing, she kept the money in stocks and bonds as her father had, wanting to hold on to it until she really needed it. She played it "safe."

She got married last year and so began to withdraw the money. She was pleased to see a chart from the broker that showed her portfolio was up about 20%. While admittedly not a great return over 12 years, her account had nevertheless survived both the 2000 tech crash and the 2008 market meltdown. She knew not all investors could not say the same thing.

Andrea began spending the money, thankful that she'd saved the money to start a family. But a cruel reality slowly began to set in: the money didn't seem to be going very far. She couldn't quite put her finger on why, but it all clicked when she saw the lofty price of a new SUV she wanted. She remembered her Dad's favorite vehicle back in the day – a Ford Ranger pickup – and recalled him boasting that he paid only $8,500 for it in 1992. A comparable vehicle today costs more than twice as much.

It hit her like a slap in the face. While the number of dollars in her portfolio was greater than what she inherited, they bought less stuff. It was such a revelation that she actually uttered the words out loud…

"My investments didn’t keep up with inflation… I LOST money!"

Gold Is the Benchmark

Whether they realize it or not, the same thing is happening to most people's investments. Over time, real returns are diluted because of inflation. The only reliable way to measure the value of investments is in terms of a financial intermediary that cannot be inflated: gold. That way, investors can tell how they're doing in real terms.

This has practical ramifications for all of us. Someday, we (or our heirs) are going to spend some of the wealth we are accumulating. How much we can actually buy with our gains will directly depend on how hard inflation has hit whatever our investments are denominated in. A 15% gain in dollars is only 9% in real terms if USD inflation was 6% during that time frame. A money-market return of 1% is a losing investment if denominated in something inflating at 3%. In Andrea's case, by keeping all her funds in dollars, her 20% gain turned into a 16% loss in purchasing power.

In other words, since most people don't adjust for inflation, their investments are not doing as well as they think.

In contrast, if Andrea had kept part of her inheritance in gold, that portion would have grown 332% (from December 1998 to June 2010, when she got married). More importantly, she would have lost no purchasing power during that time. In fact, after inflation and taxes, Andrea could've bought 50% more in goods and services than in 1998, if purchased using liquidated gold. She could buy two small pickup trucks today with the same number of gold coins it took her father to purchase the Ford Ranger in 1992. (This all while gold went nowhere for those first three years and lost a third of its value in the fall of 2008.)

With gold as her savings vehicle, she could have completely sidestepped the erosion in the dollar.

How have you done?

Re-Indexing in Gold – "This Changes Everything"

To demonstrate the effect of currency dilution, we've developed a tool for re-indexing popular indices from dollars to gold. Doing so provides a more accurate picture of the dilution of investments made in dollars (and would work just as well in euros or other currencies). We use gold in grams so the indices won't be priced in decimals.

Here's how the DOW has fared since 2000 when measured in both dollars and gold:

(Click on image to enlarge)

While the Dow Jones Industrial Average is up 4.7% in dollar terms, it's lost 82.5% when measured in gold grams. An investment of $10,000 on January 1, 2000 would total just $10,470 today (excluding dividends) – but in gold it's worth only $1,750.

In other words, investments made in the DJIA Index have not only lost money in real terms, they're worth a pittance when measured in gold. This is a breathtaking loss.

How about a broader measure of stocks, like the S&P 500?

(Click on image to enlarge)

The S&P 500 is down 15.1% in dollars since 2000, but it's lost 85.8% against gold. If you’ve owned an S&P index fund, you not only have fewer dollars that what you started with (excluding dividends) but have fallen dramatically behind when compared to the monetary asset of gold.

How about the technology sector?

(Click on image to enlarge)

Tech stocks show a whopping decline of 38% in dollars over the same time period, but money invested in that sector has lost 89.7% when measured in gold grams.

We also decided to look at some foreign markets. Are they doing better than the US?

(Click on image to enlarge)

The stock market for Hong Kong, one of the largest exchanges in Asia, shows an increase of 6% in dollars. However, it’s lost 82.3% when priced in gold.

(Click on image to enlarge)

The primary stock market for UK companies is down 22.4% since 2000 calculated in dollars, but has fallen 87.1% in gold grams.

Conclusions

Obviously, measuring portfolios in dollars exaggerates performance in real terms. This isn't to say that one shouldn't invest in stocks. It means that one must: a) be cognizant of how results compare to gold or other real assets that one might buy with whatever currency one is dealing with; b) adjust brokerage statements to allow for currency dilution; and c) not rely on stocks in general to outpace inflation.

In fact, it isn't just investments that are eroding. Our entire world is being devalued, even as one reads this article – from groceries and gas to cars and college. Someday we'll want to spend the gains we're making; how will we avoid the long-term erosion of the currencies we invest in?

The answer is simple: save in gold. The dollars you keep in a money-market account will steadily lose value year after year. In fact, monies deposited into a simple savings account in 2000 have lost an incredible 25% of their purchasing power since then. Conversely, if those savings were denominated in gold, the wealth would have not only been preserved but increased. We believe this trend will continue – and accelerate. It will become increasingly important to your financial future that you cash in earnings from time to time and save them in precious metals – not in dollars, euros, yen, yuan, or even Swiss francs.

Don't make the mistake Andrea did. Save in gold. That new car or retirement home or world travel you want to spend money on someday will be a lot easier to afford if your savings are denominated in the one asset that can't be debased, devalued or destroyed.



TOPICS: Business/Economy; Culture/Society; News/Current Events
KEYWORDS: canada; currency; economy; gold; inflation; oil

1 posted on 12/07/2011 5:21:19 PM PST by SeekAndFind
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To: SeekAndFind

Manage your own account and thereby you’re also managing your own risks (including inflation). But the happy ending is the broker made good money while the money stash eroded away.


2 posted on 12/07/2011 5:26:14 PM PST by BipolarBob (Of all the gin joints in all the towns in all the world and she walks into mine.)
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To: SeekAndFind

Where’s a good site with a plot of the price of gold in dollars over time?


3 posted on 12/07/2011 5:56:53 PM PST by yup2394871293
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To: SeekAndFind

Gold hasn’t kept up with inflation, either. If it did, it would be over $2,200!


4 posted on 12/07/2011 5:57:51 PM PST by SatinDoll (NO FOREIGN NATIONALS AS U.S.A. PRESIDENT)
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To: SeekAndFind

If I had a lot of money, I wouldn’t put it all in anything, gold included.

What I can’t figure is that everybody who says gold is going way up wants to sell you some. If they think it is going up, why don’t they want to keep it?


5 posted on 12/07/2011 5:59:50 PM PST by tickmeister (tickmeister)
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To: yup2394871293

http://www.kitco.com/market/


6 posted on 12/07/2011 6:01:03 PM PST by cowtowney
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To: tickmeister

“What I can’t figure is that everybody who says gold is going way up wants to sell you some. If they think it is going up, why don’t they want to keep it?”

Couldn’t you say that about any commodity?


7 posted on 12/07/2011 6:02:49 PM PST by cowtowney
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To: SatinDoll

What do you think has been better at keeping up with inflation?


8 posted on 12/07/2011 6:06:44 PM PST by cowtowney
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To: SeekAndFind

Bookmark


9 posted on 12/07/2011 6:29:50 PM PST by DocRock (All they that TAKE the sword shall perish with the sword. Matthew 26:52 Gun grabbers beware.)
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To: cowtowney

I’m not being a smarty-pants when I say this: cottage cheese.

I literally lived on cottage cheese when I was at university. It cost 36 cents per pound then (1976). The price today is nearly $1.00. And tomatoes? OY!


10 posted on 12/07/2011 6:42:08 PM PST by SatinDoll (NO FOREIGN NATIONALS AS U.S.A. PRESIDENT)
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To: SeekAndFind

If you’re buying computers, you get more for your money every day despite inflation.

If you saved money in gold to buy computers later, well, you’re golden!


11 posted on 12/07/2011 7:23:53 PM PST by AZLiberty (No tag today.)
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To: SatinDoll; SeekAndFind
The issue I have with this article is that it starts in 1997. Anybody can pick a point in time to support their case.

I like information I found at the following website Measuring Worth.

If you compare the market price of gold per ounce with the average weekly production worker's wage since 1942, you will find that gold has done quite nicely over a 70-year horizon. Of course, there were periods of time when the price was obviously manipulated.

12 posted on 12/07/2011 7:24:09 PM PST by beancounter13
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To: tickmeister

“What I can’t figure is that everybody who says gold is going way up wants to sell you some.”

Investors make money by buying low & selling high; the sellers bought low, and have to sell high to make money. Basically, they need someone who thinks ass-backwards to dump their holdings on.


13 posted on 12/07/2011 7:25:20 PM PST by kearnyirish2
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To: SeekAndFind

I’ve posted on FR a grid showing my home value from 2004 to today in terms of dollars, ounces of gold, and ounces of silver

the loss is astonishing

if I had bought gold instead of my home, today I would have $1.6m worth of gold instead of a property worth $175k (down from $400k)


14 posted on 12/07/2011 7:57:27 PM PST by sten (fighting tyranny never goes out of style)
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To: SatinDoll

“I’m not being a smarty-pants when I say this: cottage cheese.
I literally lived on cottage cheese when I was at university. It cost 36 cents per pound then (1976). The price today is nearly $1.00”

Really? You think cottage cheese is an investment alternative to gold?

Despite this hilarious comparison, let’s look at your choice:

Cottage Cheese in 1976: $.36/lb
Cottage Cheese in 1976: $1.00/lb
Increased about 3x

Gold in 1976: $125/oz
Gold in 2011: $1744/oz
Increased almost 14x

Cottage Cheese


15 posted on 12/07/2011 8:06:49 PM PST by cowtowney
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To: tickmeister

What I can’t figure is that everybody who says gold is going way up wants to sell you some. If they think it is going up, why don’t they want to keep it?


Same reason Nordstrom encourages you to buy the shoes they own. It’s called being a RETAILER, and making PROFIT from selling INVENTORY.

Smirk erased.


16 posted on 12/07/2011 8:14:29 PM PST by Atlas Sneezed (Author of BullionBible.com - Makes You a Precious Metal Expert, Guaranteed.)
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To: cowtowney

You can’t eat gold, sweetie.


17 posted on 12/07/2011 8:54:24 PM PST by SatinDoll (NO FOREIGN NATIONALS AS U.S.A. PRESIDENT)
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To: SeekAndFind
"My investments didn’t keep up with inflation… I LOST money!"

Yup. And she paid taxes on the money she lost! 

Here's what we have to look forward to... This is a 50,000,000 mark note printed in 1923. At the time, it wouldn't have purchased a loaf of bread. It is one of the prime drivers that allowed a man like Hitler to come to power.



18 posted on 12/07/2011 9:38:52 PM PST by zeugma (Those of us who work for a living are outnumbered by those who vote for a living.)
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To: Beelzebubba

Bogus example. Nordstrom does not tell you to buy shoes because they will be much more valuable in the future and thus will preserve your wealth. The message that I hear repeatedly is “Gold will become much more valuable and paper money will become worthless. Therefore, give me your paper money and take my gold.”
If those who own gold believed that, they would not be sellers. They are full of something that does not glitter.


19 posted on 12/07/2011 9:56:28 PM PST by tickmeister (tickmeister)
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To: cowtowney

Not really. Most owners of commodities will keep their holdings if they think the price is due to rapidly increase. That includes both farmers with corn in a bin and those long futures contracts.


20 posted on 12/07/2011 9:58:52 PM PST by tickmeister (tickmeister)
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To: BipolarBob

Amen - manage and monitor your own assets and trust nobody who is selling you a strategy that requires you to buy from them (or anyone like them). Most investment advisers, especially on the radio, are sock puppets selling trinkets.

Gold is not necessarily the only (or best) investment. It is a marker tied to the real world. A Polaris, i.e. the North Star.

http://www.polyconomics.com/index.php?option=com_content&view=article&id=1572:a-gold-polaris&catid=46:1997&Itemid=31

Old Jude is dead and gone but his people live on: google supply side economics. Disclosure: I am a paying customer of http://brettonwoodsresearch.com/default.asp

Those dudes are pretty handy for anyone who wants to be different.


21 posted on 12/07/2011 10:15:25 PM PST by SteelTrap
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To: SeekAndFind

Suggested Viewing:

The Secret of Oz - Winner, Best Docu of 2010 v.1.09.11

http://www.youtube.com/watch?v=swkq2E8mswI


22 posted on 12/08/2011 4:10:23 AM PST by Neidermeyer
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To: SatinDoll

You can’t eat those green paper debt certificates, sweetie.


23 posted on 12/08/2011 4:11:52 AM PST by Neidermeyer
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To: tickmeister

If those who own gold believed that (Gold will become much more valuable), they would not be sellers.


1. All those claims about making money on gold have been proven true for the past decade.

2. They are retailers, and make their money by marking up the stuff they buy at wholesale, not by sitting on their inventory waiting for it to slowly increase. They are providing a service. There’s nothing to suggest that a business or individual with a limited amount of money to savce or invest (in gold) can’t process and sell much more than they could afford to hold, in order to earn a living.

3. If you don’t like the retailer analogy: I’d sound like a moron if I asked why all those stock brokers don’t just buy up all the investments they are advising their clients to buy.

4. Or realtors? Why don’t they buy up all the houses that are a good investment, instead of taking a commission on a sale to a buyer?


24 posted on 12/08/2011 5:41:40 AM PST by Atlas Sneezed (Author of BullionBible.com - Makes You a Precious Metal Expert, Guaranteed.)
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To: Beelzebubba

I understand exactly what you are saying, just pointing out that the gold sellers are being a bit dishonest in suggesting that you must buy gold or go broke. Right now I would lean toward silver as I think gold will see $1000 before it eventually sees $3000. Real estate agents and stock brokers are much the same. They pimp their offerings on the basis that they will appreciate and you will get rich when in fact nothing goes up forever and they have no idea in hell what will come next. They all want you to buy so they can make a buck, not because it will protect your wealth. I know that and will buy what I think is best for me, just get tired of the frantic sales pitch. That’s why I like to ask the breathless salesman why he wants to sell something that will make the owner rich.

And finally, I agree that paper money well eventually become worthless. For the average person I think silver, guns, ammo, booze, storable food, tools, building supplies, and anything else that you can store and that you will eventually need will do better than gold. And I believe that is true regardless of the rate at whcih paper becomes scrap.


25 posted on 12/08/2011 7:12:45 AM PST by tickmeister (tickmeister)
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To: tickmeister

I understand exactly what you are saying, just pointing out that the gold sellers are being a bit dishonest in suggesting that you must buy gold or go broke. Right now I would lean toward silver as I think gold will see $1000 before it eventually sees $3000. Real estate agents and stock brokers are much the same. They pimp their offerings on the basis that they will appreciate and you will get rich when in fact nothing goes up forever and they have no idea in hell what will come next. They all want you to buy so they can make a buck, not because it will protect your wealth. I know that and will buy what I think is best for me, just get tired of the frantic sales pitch. That’s why I like to ask the breathless salesman why he wants to sell something that will make the owner rich.

And finally, I agree that paper money well eventually become worthless. For the average person I think silver, guns, ammo, booze, storable food, tools, building supplies, and anything else that you can store and that you will eventually need will do better than gold. And I believe that is true regardless of the rate at whcih paper becomes scrap.


Now you’re talking sense, and have dropped the too-clever trite quip that is popular among anti-gold folks.

1. The dishonesty of many gold sellers (and of all those who advertise much)is that you are buying anywhere near market price, not in whether or not gold will go up in the future.

2. Right now, I lean toward silver and platinum to, because of the ratios.

3. I think you’re wrong on gold seeing $1000 before it sees $3000, and I wish there were some practical way to make a major bet.

4. All those preparedness things should come before gold, as should silver for small transactions. but gold has its place. How would you carry $100,000 in wealth in a relocation emergency?

5. The choice is not between silver and gold. The wise choice is both, for the benefits of a diversified holding.


26 posted on 12/08/2011 9:03:51 AM PST by Atlas Sneezed (Author of BullionBible.com - Makes You a Precious Metal Expert, Guaranteed.)
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To: cowtowney

Adjusted for inflation, that gold only doubled in value. And if you’d used 1979 as the buy year instead of 1976, you’d have lost value and still be behind today.


27 posted on 12/09/2011 1:07:12 AM PST by aNYCguy
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To: SeekAndFind
These charts are selected to only go back to 2000 for a reason. Sure, gold has been on a meteoric rise since 2000, and anyone who bought in 2000 and sold now has done well. But gold was depreciating in value for the previous twenty years.

All these articles do is focus on the unprecedented skyrocketing of gold in the last decade and draw vastly overgeneralized conclusions. A lot of people have lost money on gold over the long term, and will do so in the future. And more to the point of this article, a lot of people have gained dollars in gold but lost buying power. If you bought in 1985 and sold in 2005, you gained dollars but still lost value. There's nothing magic about gold; it's a volatile commodity like any other.
28 posted on 12/09/2011 1:09:11 AM PST by aNYCguy
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