Wednesday, January 06, 2010

Gold & Cadillacs: a value comparison

Mike Hewitt at Dollar Daze posted an interesting graph not too long ago comparing gold and Cadillacs, or more precisely, the value of gold as measured by its purchasing power of Cadillac cars over time.
I thought back on this great little visual recently while discussing gold's role as a store of value with a friend.

We ruminated briefly on gold's utility as an inflation hedge or preserver of one's purchasing power and I offered the classic example of the more or less constant ability to purchase a fine men's suit with an ounce of gold.


Later, we resumed our discussion by looking over the Dow to gold ratio and the similar S&P 500/gold ratio mentioned in the recent Barron's interview with Kevin Duffy and Bill Laggner.

These are all fine examples of the fact that while gold's purchasing power of real goods or assets may fluctuate during certain periods, its role as a store of value remains constant over time.


Still, I happen to believe that a picture is often worth a thousand words, and this is why I am so enamored by the Gold and Cadillacs example offered by Mike's post. 
In fact, if you compare (as Mike has) the Cadillac Eldorado 2-door coupe or convertible with its present day successor, the Cadillac XLR-V, with all its modern gadgetry and "improvements" (those so often touted in the BLS' hedonic indexing of prices), I'm sure you'll be similarly amazed to see how well gold's purchasing power has held up, or increased, in this particular instance (although we should point out that in 1971 gold was still artificially pegged at $35 an ounce, when a more realistic market price would have been $103 an ounce).