o3 BLOG | Trends
What is Purchasing Power and How Does it Affect the Value of Gold?
Gold has been an appealing commodity for investors throughout history because of its ability to maintain its value over time. We’re going to take a closer look into the purchasing power of gold over time.
What Is Purchasing Power?
Purchasing power or buying power measures the value of a currency through the number of assets, goods or services that a fixed unit of money (in that currency) can buy. When inflation occurs, the cost of goods and services goes up, decreasing the number of goods and services you can purchase for a fixed amount of money — i.e., a decrease in purchasing power.
The purchasing power of fiat currency, such as the US dollar, can become unstable in times of financial uncertainty or during a recession. Inflation, a general increase in the price of products and services, reduces the number of goods and services people can buy with a given amount of money. In other words, the purchasing power of a currency increases as prices of goods and services decrease — such as during a deflationary period. During deflationary periods, people can purchase more goods and pay for more services with the same amount of money. Purchasing power parity (PPP) is a theory that demonstrates the comparison of purchasing power vs. incomes in various countries using their standard currency.
The Value of Gold Over Time
Gold has always been a prized commodity, and we can trace its use as currency as far back as 550 BC. Today, people invest in physical gold by buying jewellery or gold bullion (bars and coins). Several factors drive the price of gold, including the state of the US dollar (greenback), political uncertainty, and supply and demand. If you speak to any seasoned investor, they will tell you that gold is the most reliable and effective way to store your wealth in the event of a total market crash. Some even say that they would revert to gold as a currency if possible. Whether or not that’s a stretch, both retail and institutional investors find value in maintaining a diverse range of gold investment products in their portfolios. However, much of the value of a gold investment depends on factors that affect its buying power.
The Buying Power of Gold
The purchasing power, or buying power of gold, is a little different from the purchasing power of fiat currencies. For one, mints and central banks print fiat currency at any given time, however, there is only a limited supply of gold. That limited supply is used in jewellery, electronic circuitry, space exploration and dentistry. While gold has been used as currency as far back as 550 BC, fiat currency first appeared in China approximately 1500 years later. Gold is virtually indestructible, which is one of the leading factors contributing to its importance in many societies. Interestingly, the indestructibility of the precious metal means that the gold that was first used as currency nearly 3000 years ago, still exists today. Gold’s remarkable chemical properties gives the precious metal longevity, making it an effective hedge against inflation and even allows it to increase in value during inflationary periods.
A Purchasing Power Example: Can Gold’s Buying Power Stand the Test of Time?
The gold-to-decent-suit ratio is an old rule of thumb that some investors use to demonstrate the stability of gold’s purchasing power. In Ancient Rome, an ounce of gold could buy a toga for a senator. In 1960, Don Draper could buy a Brooks Brothers suit for $USD 35 — the cost of an oz of gold. Currently, the price of an ounce of gold sits at ~$USD 1700, the cost of a Canali suit (fitted, of course). Using the gold-to-decent-suit ratio in today’s economy suggests that the buying power of gold has actually grown (and so has our style sense, apparently).
“Fashions fade. Style is eternal.” – Yves St. Laurent
Add to that the eternal purchasing power of gold.
Even with its recent clawback, gold has not lost any purchasing power and has proven to retain and increase in value throughout the decades. With experts predicting the cost of gold doubling within 3 – 5 years, right now is the perfect time to invest in physical gold and gold mining stocks. While the gold-to-decent-suit ratio might have worked in the past, we don’t anticipate the cost of men’s ready-to-wear fashion to keep up with gold.
To make the purchasing power of gold work for you, contact O3 Investor Relations today.
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