How to Read a Priced in Gold Chart

I have received several questions lately along the lines of, "What do these charts mean?", and "How do I interpret this chart?". This post is an attempt to answer these questions.

Price charts are simply a series of marks showing how the price of a thing has changed over time.

So what is a price, and what does it mean? The dictionary says a price is "the amount of money expected, required, or given in payment for something". But price often refers to something other than money; for instance the price you pay for eating too many deserts might be that you no longer fit well into your old clothes.  

Prices are really about tradeoffs. "Would I rather have this, or that?":  ten gallons of gasoline, or $35? an ounce of gold, or $1650? a kilo of gold, or a year's tuition at Yale?

Each time a trade happens, both sides come out better off than they were before they traded – both make a profit.  If I am hungry, I might value an apple more highly that the dollar in my pocket. And the merchant who sells me the apple would rather have the cash. He has more apples than he can eat, but his pen just ran out of ink and he can use the cash to buy a new one.

The prices of things reported every day are determined by millions of sellers and buyers making  these trades. Sellers who offer goods too cheaply can't stay in business for long, and sellers who offer goods too expensively will be undercut by others and likewise go out of business. This process is called "Price Discovery".

Factors like supply and demand, fashion preferences, technology, and demographics cause some items to command higher prices than others. And over time, these factors change, causing some things to become more expensive while others become cheaper.

Prices are usually quoted in the local currency, or in US Dollars (currently the world's primary reserve currency).  But when these currency units are gaining or losing purchasing power over time, it becomes hard to compare prices from two different dates. It is hard to see the real changes in prices because they are obscured by changes in the value of the currency itself.  And the biggest driver of these changes in currency values come from central banks changing reserve requirements and issuing new money through a vast array of schemes.

As prices are published and quoted, they influence buying decisions in many areas of the economy. For instance, gas prices may change the number of type of cars being purchased. House prices affect decisions to rent or buy a home. Food prices affect what we eat, where we choose to live, even how many children we have. When these prices are misquoted or misunderstood, people can be lead to make poor decisions.

This is where gold comes into the picture: it is a form of money that has been in use for thousands of years, is recognized and valued world-wide, but is NOT issued by any central bank, and therefore is perfectly suited to tracking prices of things through time. To find the price in gold for a thing on a certain date, simply take the thing's price in dollars on that date, and divide by the price of gold in dollars on the same date.

What does this number mean?  Well, if you sold the thing, this is the amount of gold you could buy with the proceeds – the thing's price in gold.  Or to turn it around the other way, if you wanted to buy the thing, this is the amount of gold you would have to sell to get the cash to buy it – again, its price in gold.

As we learned earlier, price charts are simply a series of marks showing how the price of a thing has changed over time.

Let's take a look at a sample chart, in this case, Berkshire Hathaway B Shares, priced in gold:

See the horizontal blue line just below 2.0? That marks the price of BRK-B on Jan 10th, the last point on this chart.  At the close on Jan 10, you could have sold one share of BRK-B, and received enough cash to buy 1.76 grams of gold.  On that day, the two things, one BRK-B share and 1.76 grams of gold, were being given the same value by the buyers and sellers in the market.

If you had bought that share any time after Q1-2011, you would have paid less than 1.76 grams for it, so you could have sold it on Jan 10th for a profit, receiving more gold than you paid to get it.  If you bought it at any time between 1997 and Q1-2011 (except for a few weeks in early 2009), you would have paid more than 1.76 grams of gold to buy it, and selling it on Jan 10th would have returned only part of your initial investment (ie., you would be taking a loss).

One way to read this chart is to think of it as comapring two investment strategies: holding physical gold, or holding a share of BRK-B. During 1997, you were far better off holding the B share. In fact, every gram of gold invested in BRK-B would have doubled or tripled! In 1998, BRK was extremely volatile, and holding gold would have given about the same return with less risk. 1999 was a disaster for BRK; you would have been much better off holding gold. In 2000 and 2001, BRK recovered strongly, but failed to break out above its 1999 high. From 2002 to 2011, you would have been far better off to own gold than BRK-B; for every 100 grams of gold invested in BRK-B shares in 2002, only 20 grams remained at the bottom in 2011.  But since then, the shares have outperformed gold.

Clearly, if you could "buy low and sell high", trading your gold for stock when the stock was cheap (1996) and selling and putting the proceeds into gold when the stock was expensive (1998 or 2001), and selling the gold and buying the stock again in late 2011, you would now be sitting on almost 5 times the amount of gold you started with in 1996, after just 3 trades.  And since the US Dollar is worth about 1/4 as much today as it was in 1996 (when gold was under $400/oz), your investment today would be worth about  20 times as many dollars as it was in 1996!

Having good price information is key to making good economic and investment decisions. When governments and central banks are debasing their currencies, it becomes difficult to read what is really happening to the prices of the underlying commodities or investments. It is easy to think your investment is going up, even though it is falling, because the weakening currency makes all prices look higher than they really are.

That's why it is so important to always price in gold.