How to Price in Gold
Recently, I have received several emails asking for more details about how to price things in gold. Here is one example:
Greetings Sir Charles,
I've just discovered your blog on prices in gold, and I found it very interesting.
However, now I am curious about how the amount of gold a specific good costs is calculated.
I was just wondering if you could give me a brief explanation to help me to understand.
Thank you very much for your time!
The process is very simple in theory: just divide the price of something in currency by the value of gold in that same currency on the same date.
For instance, suppose I bought a house for USD 100,000 on June 23rd, 2003. Gold on that date was USD 355 per ounce. So I paid 100000 / 355 = 281.69 ounces of gold for my house. This means I had a choice: I could have used my $100,000 to buy 281.69 oz of gold, or to buy the house. Or perhaps that I had to sell 281.69 oz of gold to get the money to buy the house.
Today, I might be able to sell the house for USD 200,000. But gold today has a price of about USD 1,700, so the price of the house today might be 200000 / 1700 = 117.65 oz. On paper, in USD, I have doubled my money. But that money will buy 58% less gold – and also less food, less gasoline, etc. Not a good investment.
To build a chart, just collect a set of prices with their dates in a spreadsheet, and convert each one to gold by dividing by the gold price on that date. I usually use the London PM fix price, which can be found at the LBMA website. The resulting gold price table can then be converted to a chart by the spreadsheet program.
I offer custom charting which is great for long term charts, and charts of hard to find items, but to price financial assets, like stocks, you can also use the excellent StockCharts.com service. Simply enter the symbol of the security followed by ":$GOLD". This will do the conversion for you, plotting the prices in ounces of gold. These charts are very detailed, showing high, low, open, close, volume, and many technical studies. For example, here is a "SharpChart" of Microsoft (MSFT) priced in gold, as of 2-Mar-2012:
This chart shows that if I had bought 100 shares of MSFT in early December, I would have paid about 1.45 ounces. If I sold those shares today, I would get about 1.85 ounces of gold for them – a profit of 27% in just 3 months! Sweet! This is why we invest: to grow our wealth in real terms, to "grow our gold". Of course investing carries risk as well, as the house example demonstrates.
For safety of savings, or when out of the market, keep your cash in gold. When investing, have a money management strategy that will get you out before losses (as measured in gold) become too great.
I hope this is helpful!
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