Wednesday, March 07, 2012

Pricing something in gold

Some people have asked how you price something in gold.

It might seem a silly question as one can price something in gold simply by dividing the price of the article or service in question by the gold price on that day.

But importantly the issue is more about the changing values of gold and currency when it comes to buying products and services. The following example demonstrates the value of buying gold instead of property or shares.

If you bought a house in June 2003 for 100,000 dollars. That house might very likely sell today for about 200,000 dollars. Twice what you paid for it. On the face of it that sounds like a good investment but when you translate that into gold ounces it paints a completely different picture.

In June 2003 gold was around 355 dollars an ounce. So if one used gold to buy the house it would have cost 281.69 ounces. If one had simply kept the gold and not used it to buy a house that 2871.69 ounces would now be worth 478,873 dollars. Take 200,000 from 478.873 dollars leave a very nice gain if you kept the gold but a net loss of 278,873 dollars if you bought the house.

So, in this example, putting money into property, at this time instead of gold is not always what it is cracked up to me.

The same applies to buying stocks or shares. The question to ask is, how much will the shares go up as compared to the gold price?

You can do this with any product or investment. There are heaps of historical charts on this website where one can find out what the price of gold was any year and compare that with the price now. Looking at the cost of goods and services then and now gives you an appreciation of the difference in price, not just due to the rise in the goldprice but also due to the depreciating of the dollar.

Taking this into account the term buy gold takes on a whole new meaning.

Indeed, one can build a chart using excel or a similar program to chart the price of various goods and services in gold price terms. As well as applying stock and shares it can even be applied to exchange traded funds.

It all goes to show that when it comes to investment gold can hold its own against almost any other form of investment despite there being no dividends.

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