It is natural that we measure things
by a familiar yardstick - the problem is that
being so-biased or lazy, we can be deceived.
Take gold. Popular belief has it that
gold prices have not performed especially well
despite some egregious geopolitical and economic
factors. Well measured in 72 currencies, gold is
at ... or within a few percentage points ... of
being at an all time high for people in those
countries. Not on the list are the British
Pound, the Swiss Franc, the Euro and Chinese
Yuan - but we are not far off in all of those
currencies too. Only in USD does gold lag - and
not all of us live in the US.
Using the dollar gold price, as most
of us do, has disguised what is actually quite a
powerful bull market. If my memory serves me
right, we saw the same phenomenon - a stealth
rally in minor currencies - ahead of the last
major gold bull run (in dollars) in the late
1990's. Arguably this may be a very good leading
indicator.
Faulty yardsticks also takes us onto
wealth management. Measuring our net worth in
local currencies, we might be rather pleased
with ourselves - smug even. However we chose to
ignore the fact that the yardstick is not a
constant ... it is shrinking and sometimes
really quite fast. It's the natural corrosive
effect of inflation. Knowing this, governments
give us a gauge for yardstick shrinkage to use
such as RPI or CPI, to reassure you that the
shrinkage is minimal... and then lie about it.
There are alternatives.
In the US, the Chapwood Index is
highly regarded as it reflects the true
cost-of-living increase. Plainly and simply, the
Index shows that incomes can't keep up with
expenses, and it explains why people
increasingly have to turn to the government for
entitlements to bail them out. The basis of the
Index is fullly open to scrutiny and if correct
suggests Americans have been losing roughly 10%
of their wealth each year since 2014. Half of it
gone. This compares with the official government
figure of 1.9%. Ronald Reagan called inflation
"the thief in the night" and it is built for
times just as this. It gives the appearance of
being wealthy (maintaining high nominal values)
while eroding your actual position - which
manifests itself in far higher costs on the
other side.
Interestingly, gold has seen an
average year-on-year gain of about 10%
compounded since 2000 - off-setting those real
losses - which reaffirms in our mind that it
continues as a reliable yardstick against which
to measure costs or indeed wealth. In short,
gold has maintained what economists call
"purchasing power parity" for millenia. So not
only is it an excellent yardstick - its actually
quite a useful thing to own - especially if you
fear wealth erosion.
Many crises invariably start with
stealth inflation and then follows currency
weakness - so gold gets expensive and then it
blows out significantly higher in your local
currency. Then you realise that the lifeboat has
sailed ... the choo-choo train has left the
station.
For the unprotected, your backstop
plan to protect your wealth by "buying gold when
I need it" has just failed. You are now trapped
with a dissolving currency and every financial
escape route looks too expensive ... and so it
goes. Ask anyone in one of those 72 countries
(see below) where gold is starting to look
expensive.
In short, insurance is best bought
before you think you need it ... boring, but
true.
