The Three Wise Men and the Price of Gold
This is the time of year when tradition takes over the rituals of life so, given the recent activity in global markets we thought we might take a whimsical, unscientific trip down memory lane to place a value on the gifts brought by the Three Wise Men (TWM) from the East. (Surely an oxymoron - Ed.)
First, assuming one can find TWM, they are supposed to have brought frankincense, myrrh and gold. Now, frankincense, we suppose, has its modern equivalent in the smells department that you can purchase at the drug store for a few dollars and change. No fantastic value there. Myrrh sounds like something one suffers from after a bad head cold. No great value there either. So the real question is how much is the gold worth.
This week saw Lenin, who said it was only fit to line lavatory walls, take one on the chops and Mrs. Watanabe, our archetypal Japanese housewife, score another victory as gold soared its way to five year highs settling at week end at $ 340 an ounce. Since the market price is where supply and demand pressures intersect at that moment, one can reasonably argue that is what gold is worth. But over the last thirty years the market price has varied from $40 to $800. Today, what might be said to be a fair value?
We started looking at the US GDP price deflators. We knew in 1932 it was priced at $20.67 and increased to $35 by President Roosevelt in 1933. It is reasonable to say it was undervalued in 1932 and over valued in 1933. The GDP deflator has increased in the interim 11 times indicating, on this basis, a possible price range of $227 - $385. Interesting, but not the result we hoped for, so further work was needed.
One does not have to be a conspiracy theorist to believe that the Government will use every legitimate trick available to present its figures in the best possible light - and understate inflation. Just remember hedonic price indexing! In the current case they have used chain-weighted price indices. There's a rationale for that - as prices go up an individual will tend to adjust his purchases by substituting cheaper items for more expensive ones - but it does not show how much a fixed basket of goods would cost in today's money.
We thought we would look at how some individual prices had developed over the last forty to fifty years that we have been tracking them in the UK and North America.
Our first job, requiring some scientific education, at 16 years of age paid GBP 3.50 a week. Today, our daughter at age 15 earns GBP 4.50 an hour. That's a 51-fold increase and reflects increased real earning power and wealth over the period. Allowing for the pound's devaluation in the meantime that is still a 30-fold increase in USD terms, almost three times the figures given from the US Government's GDP figures. That would indicate a price range of $ 615 to $1,041 and still ignores inflation from 1934 to the mid 1950s, which would have increased the price range further.
We looked at another job we had done and compared what a bus driver earned in 1958 in the UK and today. (In truth, we were a bus conductor and they only have drivers today). In dollar adjusted terms that provided a 33 multiple.
Then we remembered our early visits to the barbers. In the early 1950s we had to spend 6d for a haircut and adults one shilling - that is 5 pence in new money. Today, it is impossible to get a haircut for less than GBP 7 in a barbershop in southern England and GBP 11 is more normal. The lower figure gives a multiple of 81 in US dollar adjusted terms. Now we have a price range of $1,674 - $2,835.
But to avoid too UK a bias, we also looked at an unscientific selection of North American prices.
We remember from our first visit to North America that a night at the Queen Elizabeth Hotel in Montreal cost C$6 in 1961 and has increased to C$160 today - an 18 bagger in USD adjusted terms.
A single room at the Vancouver YMCA cost C$2.25 in 1961 and C$46 today - a 13.7 multiple.
A single room at the Seattle YMCA increased from $3 to $60 over the period a 20 multiple.
We also remember that a haircut at the Seattle barber college on Skid Road cost $2 in 1961. Unfortunately, have no idea what it costs today, but 15 years ago it was still possible to get a haircut in Falls Church, Virginia for $10, a mere 5- fold increase that might be 10 times today, at most.
Obviously, services have increased in price more than goods and commodities and that is how it is expected to be since they are more protected from foreign competition. Interestingly, wages and prices have increased much more in the UK than the US even after adjustment for the pound's devaluation.
But the question of haircuts reminds us of a so-called iron law of economics introduced by Nick Storr, on some accounts the finest agricultural and developmental economist since Peter Bauer never to win the Nobel prize.
Nick published a book on his researches around the world called Ten Times the Price of a Haircut. This is sometimes available on www.amazon.co.uk and is one of the funniest books I have ever read. After years of work on development projects in Africa, Asia and the Pacific, with sojourns in North America and Europe, he formulated the politically incorrect view that the price of a romp in the hay, wherever he was working, was about ten times the price of a haircut. His strategy on arriving at a new town was to ask the taxi driver the price of a haircut to give him an understanding of the lie of the land. Unfortunately, Nick passed away this year taking much of his invaluable data with him, so we are unable to use it to verify our random samplings.
So how do we value the price of gold today?
You can take your pick. The broad US government price deflator data provides a range of about $227-$385. But incomes and wealth have grown at two to three times the increase in price levels over the period and so much higher price levels would be commensurate with increased incomes and ability to purchase globally.
We would note that gold increased in price by over 20 percent in 2002 in US dollar terms. Given all the global uncertainties, we would be surprised not to see the same in 2003 which would put the price over $400 this time next year.
Maybe the TWM should be shopping early for Christmas 2003!
William R. Thomson
28 December 2002
Wt@momentum-asia.com.hk
William Thomson is Chairman of Momentum Asia, the Asian arm of a manager of alternative investments, and Chairman of the Siam Recovery Fund. He was with the Asian Development Bank from 1985 to 1995 as a member of the Board and as a Vice-President. He is a former US Treasury official, and writes widely on economic and financial issues.
Viewpoint is a regular feature of ADB Review. Prepared by a senior journalist, academic, or analyst, the articles are meant to provide fresh perspectives and stimulate debate on development issues. The material in this article does not necessarily reflect the official views of ADB.
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