The Purchasing Power Of Gold Part II

A couple of months back, when the contretemps over the Kelantan Gold Dinar was at its height, I did a post on testing the stability of gold’s purchasing power. But in the last couple of weeks, gold on the international markets has been breaching new highs, virtually on a daily basis:

Gold price rises to yet another high, other commodities too rise

PETALING JAYA: Gold rose to a new all-time high yesterday, while other major raw materials – from copper to cotton – continued to head north as some investors see commodities as safer bets against inflation.

Spot gold price hit US$1,328 an ounce following a surprise pledge by the Bank of Japan yesterday to keep interest rate at virtually zero and to step up purchases of assets.

This had sparked fresh worries that central banks in developed countries may have to further their so-called quantitative easing policy to bolster their ailing economies...

I thought it might be interesting to show a few charts, and put this bull market in some perspective - especially a Malaysian perspective. More specifically, is the rise in gold a purely USD phenomenon or is the MYR affected as well? Anybody who’s had the misfortune of having to buy gold jewellery in Malaysia over the past few years will probably attest that gold is definitely going up against everything. But the pertinent question is really to what degree? And does it make sense to exchange MYR for gold (given its holding cost)?

So here’s the monthly average price gold in USD terms (per troy ounce; sample 2000:1-2010:9):

This doesn’t incorporate the latest price increases, but it will suffice for my purposes. Now here’s gold in RM terms, and I’ve also taken the liberty of converting to grams (which means you can check the prices against that quoted by local gold shops):

Gold is up 12.0% against the USD since the beginning of the year, but just 1.9% up on MYR – remember, this is for monthly average prices, not the latest prices as quoted in the article I linked to above.

But this does illustrate my point – the international gold price is being driven as much by a depreciating USD as it is by investor demand. To put this more clearly, I converted the two series above into indexes to facilitate direct comparison. Second, I deflated both series by CPI-based inflation to arrive at inflation adjusted indexes. The results are shown below (2000=100; click on the pic for a larger version):

Whether you’re looking at nominal or real numbers, gold is gaining ground against the USD. But against the Ringgit, gold has barely budged on an inflation-adjusted basis for the past year.

You’d still be ahead over the long term (about a 100% gain over the last 5 years), but if you came in over the past year, you’ve lost in Ringgit terms if you factor in the holding costs (storage plus opportunity costs).

While gold has kept (and generally increased) its purchasing power, those speculating on its value might not be so happy.