In his latest Interest Rate Observer, Jim Grant discusses the chance discovery by a 55-year old hobbyist of 11 pounds of gold memorabilia dating from the 7th century, and proceeds to provide a truly memorable parable on the definition of "assets" which is as illuminating as it is obvious.
Jim quotes Roy Jastram:
"Gold has two interesting properties. It is cherished and it is indestructible. It is never cast away and it never diminishes, except by outright loss. It can be melted down, but it never changes its chemistry or weight in the process. Its price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century."
So how does gold, which many argue is the only true store of value, stack up when represented not merely on its day-to-day price fluctuations, but looked at through the filter of a true long-term perspective?
Let us say that an ounce of gold bought the same proverbial "good man's suit" in 650 A.D. as it does today. Maybe it bought a suit of armor. Jastram constructed a price index for gold for which the beginning year was 1343 and the end point was 1976. Colleague Tim Hlavacek has updated the index to incorporate today's spot gold price.
Let's see, Hlavacek reasons: 11 pounds of gold works out to 160,416 troy ounces. Times the current gold price, the trove would be worth $159,020 in bullion value alone. Never mind, for now, the archaeological value. Divide that $159,020 by Jastram's (updated) multiplier to find the value of those ounces in the money of the year 1343. The answer: $569. Now imagine that that $569 in gold value was converted into the currency of the day and invested in King Wulfhere's perpetual 2s. After 666 years, the ever-so-patient investor would be sitting on $304 million.
What about extending the time series to that distant day in the 7th century when the newly discovered treasure was buried deep in the British countryside?
At press time, no reliable price data for the years 650 to 1343 had presented themselves. But let us assume that Jastram's index number behaved over that span as it did between 1343 and the present. In that case, Hlavacek continues, the value of the artifacts at the time the vanquished surrendered them in the middle of the seventh century would have been $2.0347. And it is here that we come face to face with human tragedy. If those two little dollars had been invested and continuously reinvested, in 2% consols in the year 650, they would be worth $991 billion today. At 2.5%, the would be worth $762 trillion; at 3%, $568 quadrillion, or maybe just enough to pay fro the Obama administration's projected health-care initiative. [emphasis ours]
And for some truly inspired poetry from Mr. Grant:
The truth about the long term, then, is that it consists of a sequence of short terms and these short terms are full of episodes we call history: war, peace, pestilence, progress, revolution, invention, discovery, depression, enterprise, bankruptcy, birth, death, taxes and such. Kingdoms rise and fall, debts are incurred and repaid, or - as often as not - not repaid, or repaid in money unrecognizable to the poor creditor. Interest runs for years at a time, but rarely even for decades, politics or central banks intervening to disrupt the piling up of what would otherwise be wealth too vast to be stored on the planet Earth. Through it all, just as Hall and Jastram have separately noted, gold endures, holding its value but returning no income. Well, you can't have everything.