Gold vs Dollar
For a long time I wondered why the prices of homes moved so much faster then the prices of other things. In the seventies they started acting more like Aladdin’s lamps than houses. No matter how much we wanted out of them, they never said no. We didn’t even have to polish them up and poof, more money came out of them.
Say you were fortunate enough to buy a nice house in a nice area of Seattle for $20,000. In the year of 1970. Ten years later you check around and it’s worth $80,000. Forty years later it gets even better - the going price is $510,000. It’s the same house, the same street - no fancy upgrades or gentrification.
Over the years I’ve heard lots of casual explanations for this incredible feat of making money out of thin air. Supply and demand was one stock answer. But we didn’t have the tsunami of immigrants to the state that would have caused house to quadruple the decade of the 1970’s. Another answer was inflation. Budget & Labor Statistics figures, (http://www.bls.gov/data/inflation_calculator.htm )tell us that any other basket of goodies costing $20,000 in 1970 would cost $111,800 in today’s dollars. That discrepancy of $400,000 means that we’ve got inflation plus something else.
During the 1980’s both spouses began working, sometimes doubling the income of single households. Better yet, DINKS (double income, no kids) came along and could afford bigger house payments. That explained where the money to pay for the bigger mortgages came from. But why the rising prices in the first place?
Might it be that the government policies of ever more generous tax breaks for home-owners encouraged ever growing demand? In the 1970’s you were taxed at the capital gains rates on your gain when you sold your home; you could carry forward your gains to the next house and so on and on and you’d never pay a cent in taxes. Not to mention the write-off for mortgage interest and taxes.
In the 1990‘s it got even better. Each land-owning citizen became entitled to keep $250,000 of gain tax free. This allowance could be repeated every 2 years. It didn’t matter whether you carried that gain forward into another home or spent it on a camel caravan to Timbuktu. These were powerful incentives to buy and gave some compensation for the pain of rising prices. They maybe accelerated the process, but they hardly caused it.
I’ve heard a few Seattleites say it’s all Bill Gates’ fault, bidding up house prices to the level of a Boston or a Silicon Valley. Ah, but that came later, much later than the 400% appreciation we saw by 1980. Mr Softy’s millionaires piled on later and then we all kept rubbing the lamp.
Recently I came across an article that put 1971 into perspective
In the early 1960s, Charles de Gaulle induced the Bank of France to convert large amounts of dollar reserves into gold. The reasoning was that the reserve currency role of the U.S. dollar was being seriously undermined by large U.S. balance of payments deficits that were inflationary under the gold-dollar international monetary system.
The French … bought their gold at $35/oz from the U.S. Treasury. The dollar remained under pressure for some years, leading President Nixon to abandon the gold-dollar peg and convertibility of the dollar into gold in August 1971. Over the next eight years, gold rose in a series of moves to $1,000/oz, not far from today’s level. Price inflation in the U.S. and other major countries soared to almost 15% at the peak in the 1970s.
http://www.boeckhinvestmentletter.com/newsletters/
The cost of that $20,000 house in gold was
571 oz at the 1971 rate of $35 an ounce. At the time $35 seemed a reasonable price, as gold had held a steady $20.67/oz from 1880 to 1932! From the 1930’s till 1971 it bounced between $35 - $45/oz.
A mere ten years later (1980)the price of our house went to $80,000 and gold had climbed to $600 an ounce. It would have taken only 133 oz of gold to buy it. The dollar price went up 400%; the price in gold went down by that much.
Fast forward to 2009 and same house is valued at $510,000. Take out the inflation on the original price ($90,000) and you have a $400,000 price tag. At today’s $950 oz, that’s 421 oz - enough to buy the house and $142,500 left over.
So far gold has preserved its purchasing power better than dollars. If gold were to go to $1000 oz this year and the dollar house price remains the same (both seem quite probable), anyone who held that original 571 oz would be even farther ahead.
Going off the gold standard removed any predictable limit to dollar prices of any investment - equities, homes, commodities. Perhaps one day the lack of appetite for dollars will provide a limit.
