TIVOLI, New York – The Dow plummeted 211 points – or 1.2% – yesterday.
The Shanghai Composite was flat. Gold rose $4 in New York… bringing it to $1,107.
Is gold reasonably priced? Too high? Too low?
“A Car for the Great Multitude”
In the museum in the Old Rhinebeck Aerodrome in upstate New York is an early automobile.
We didn’t get a chance to study it in detail. But the collection includes a Sears Motor Buggy built in about 1910. It was on sale then for just $395.
It is a simple vehicle – a real “horseless carriage.” It was the new technology of the time, and more promising than probably almost anyone realized. But the motor was finicky. The ride was bumpy. And it was very noisy, more of a novelty than a serious way to get around.
Still, Sears’ technology was “cutting edge.” And he was turning out hundreds of these new cars.
But more edges were being cut in Detroit.
Ransom E. Olds, the founder of Oldsmobile, had already perfected the assembly line. Henry Ford was not far behind him, taking production to a new level of efficiency and output. Ford By 1910, half of the automobiles in the U.S. were Henry Ford’s Model T’s. He priced them low and made his money on volume.
By 1925, his factories were turning out 9,000 to 10,000 cars a day. Two years later, when Model T production ceased, Ford had made 15 million of them.
Ford sold his Model T’s for just $260 – enough to make the Ford family rich and make the Ford Motor Company one of the world’s leading enterprises.
The Golden Ratio
But how much was that in today’s money?
It depends on how you adjust for inflation, which is far from an exact science.
Typically, we see estimates that the dollar has lost 95% to 98% of its purchasing power over the last 100 years. Although there are only three percentage points in the difference between the two numbers, they have a big effect on the calculation.
A loss of 95% implies that today’s dollar only has 5% of the purchasing power it had 100 years ago.
That means the price of a Model T today would be 20 times as much as it was then – or $5,200. And if the loss in the purchasing power of the dollar over that time is 98%, today’s price would be closer to $13,000.
But the price of Ford’s current everyman car, the Fusion S, is about $22,000 today. That’s 85 times more expensive than the Model T was in gold terms.
Meanwhile, in dollar terms, gold is worth 58 times more than what it was in 1915.
If gold prices had risen at the same rate as car prices (i.e., 85 times instead of 58 times), it “should” be at about $1,615 an ounce. And gold bugs would be tickled pink.
A Famous Announcement
Monday was the 101st anniversary of Ford’s famous announcement: He would pay his workers a shocking $5 a day.
With gold then priced at $19 per ounce, that was roughly an ounce of gold for every four days of work.
Today, the United Automobile Workers (UAW) union rate is $73 an hour, including health care and pension benefits.
An eight-hour day at this rate would earn you $654, including benefits. Four days at this pace gives the worker $2,616 – more than enough for two ounces of gold today.
So, in gold terms, the autoworker today earns about twice as much as he did 100 years ago, which doesn’t seem like much of an increase for an entire century.
Either the price of gold is too high… or too low. How’s that for a helpful analysis?
But had gold kept up with UAW hourly wages, it would be priced at about $2,485 today.
And at today’s gold price, it takes 20 ounces to buy Ford’s cheapest car.
That is six ounces more than it cost to buy the Model T.
Divide $22,000 (the price of a Fusion S) by 13.7 (the number of ounces of gold it cost to buy a Model T) and you get a gold price of $1,605 an ounce.
Is gold too high? Too low? Who knows? But we wouldn’t worry about it.
Read the original article on Bonner and Partners. Editor's Note: If you enjoyed Bill’s article, sign up for the Diary of a Rogue Economist and get his special report, "The One Secret You Must Know to Be Successful". Copyright 2015. Follow Bonner and Partners on Twitter.