One of the characteristics of gold is that it preserves wealth in a world of constantly devaluing fiat currency.
Put another way, it preserves your purchasing power over time.
If you hold onto dollars for several years, they will buy less stuff at the end of that time period than they did at the beginning. This is especially true when we have rapidly rising prices as we do today. But even when inflation is “under control,” Federal Reserve policy is to devalue the dollar by 2% every year.
It simply doesn’t make sense to hold onto dollars for any length of time.
We can demonstrate this in a tangible way by pricing a good or service in gold and examining the change in price over time.
As an example, let’s consider a high-end men’s suit.
In 1900, the average price of a high-end men’s suit was around $35.
At the time, the price of gold was set at $20.67 per ounce. That means a high-end suit priced in gold would have cost around 1.7 ounces of gold.
Today, the average price of a high-end suit is around $2,000.
Obviously, prices vary depending on the brand, region and other factors, but this provides a fair average. At the time I’m writing this, the price of gold is around $1,840 an ounce. I’ll use $1,800 for this calculation to keep it simple. That means a high-end suit priced in gold today costs a little over 1.1 ounces of gold.
As you can see, the price of a suit in gold has dropped a little over 35% since 1900. This is what you would expect given advances in technology and productivity. But priced in dollars, the price of a high-end men’s suit has increased by 5,614.3%.
Looking at it another way, if you had stuffed $41.34 under your mattress in 1900, today you might be able to buy a couple of Polo shirts if you find a deal. But if you had bought two 1-ounce gold coins and stuffed those under your mattress in 1900, today you’d be able to buy a fancy suit and have about $1,600 left over.
Of course, the price of gold fluctuates day to day, month to month, and year to year. In some years, the price of gold even falls. But over time, it has historically maintained its purchasing power even as fiat currencies lose buying power year after year.
Added to the fact that it carries no counterparty risk, gold is an excellent way to safely preserve wealth and mitigate risk in your portfolio.