Historical Price of Gold
There is an adage in economic circles that a one ounce gold piece could always buy a good mans suit. This Amateur Economist wanted to try this theory on for size and test its validity.
To begin, we needed a starting point in history, the financial data for the price of an average man’s suit and the price of an ounce of gold during the same period. The starting point was easy enough as this is where our information began for the price of a man’s suit. The schedule used was a decade by decade retail price survey in the Daily Record, of Morris County, New Jersey from 1900 – 2010.
The historical price for an ounce of gold are derived from historical records easily obtainable on the Internet and presented in American currency. Since the graph below is presented in decades and not year-by-year, gold prices are adjusted for the years 1980 and 2010 by using an average price for the ten years preceding that year. As most novice and amateur economists are aware, the price of gold became unrestricted in the early 1970’s (* in graph) and fluctuated wildly during that decade – hence an average for the decade are used. As for the 2000’s (** in graph) the price rose from $279 per ounce in 2000 to $1,224 in 2010, so the average for the decade are used here as well.
The data presented in the graph above and does indeed show a close correlation between the average cost of a man’s suit and once ounce of gold.
Is this close correlation simply an economic fluke or is something else going on here? And what happened between 1970 and 1980? From 1900 to 1971, the U.S. dollar was tied to the price of gold so prices were somewhat stable. The idea of economic ideas of monetary “inflation” and “deflation” of products and services were relatively unknown, as price fluctuations were generally caused by supply and demand. The gold “link” between the gold and the U.S. dollar was released in 1971 and since that time, both the price of gold and the price of suits has increased generally in tandem.
However, there is one small spot of the suit which is hard to ignore, and it’s not from coffee bought at Starbucks this morning. Currently, the price of an ounce of gold is hovering at around $1,200-$1,300 – at least for the last few years. However, the average price for a man’s suit is $500-$700 dollars. So does our comparison still apply?
In this case, either the price of the suit is too low, the price of gold is too high, or a little of both. More than likely, it’s a little of both. Since the worldwide economic expansion of manufacturing several decades ago, most textiles (clothing, towels, sheets and yes, mens suits) are now made countries with a lower cost of manufacture than the U.S. As a result, the price of the suit, compared to the price in previous decades when it was manufactured in the U.S., are probably much less than it would be if manufactured here. So the current price of the suit is actually less than it would be compared to earlier decades.
Whereas the price of the suit is probably less than it should be, the price of gold is likely higher than it should be. Gold prices are extremely fluid, moving up and down daily on global news and influenced by currency fluctuations and national monetary policy decisions. In many financial circles, gold has become a “hedge” (quasi insurance policy) against dramatic drops in the value of a nations currency and loss of faith in the monetary system. Gold prices are also highly influenced by large market mechanisms, often by unseen and unknown algorithms and computer programs within a firms programing trading software.
So if we assume the current world economic system was calm with general growth in most major world economies – added to normalized monetary policy, i.e. historical federal funds interest rates (5-7% vs. the current nominal 0%), then most economists would agree that the price of gold would, indeed, be lower. Check the 2015 Economic Forecasts to see if the price of gold is mentioned.
Using the current price of gold of $1250 and ounce and the average suite price of $600, the average of both is $925. Given a calm economic world and a more “fair” trading platform, the price of gold would then settle at $925 per ounce with the average price rising about 54% to $925. Still a great price for a suit, and for a gold coin!