Gold: The T-Bone Steak Indicator
by Michael S. Rozeff
by Michael S. Rozeff
Using money supply data, I once estimated that gold was worth between $656 and $1,099. The average of those two figures is $877.50. There are all sorts of money supply measures. The subject is esoteric. Let us use something closer to home to estimate the value of gold, namely, T-bone steak.
How much is gold worth today in 2008? It was $20.67 until 1932. T-bone steak in the 1920s was 25 cents. I have one document showing this price, and a regular price of 40 cents. As a child I saw a huge sign painted on a building being torn down that read 25 cents for T-bone steak. I take the 25-cent price as the 1920s price. Today the same T-bone steak is $8—10 a pound where I live. Albertson's sold T-bone steak in 2005 for $8 a pound in another part of the country. I'll use $10 as the T-bone steak price.
T-bone steak today is 40 times its price in the 1920s. Gold is therefore worth 40 x 21 (rounding the $20.67 up) = $840 an ounce.
The assumptions in this calculation are many. It assumes that T-bone steak has more stable demand and supply curves than gold and can serve as a numeraire (medium of account) for gold. (Men's suits are sometimes used in this vein.) You can vary this calculation for yourself by choosing other prices, goods, and starting dates that you think are more accurate.
A number of other meats on my 1920 list did not go up as much. Hamburger was 2 pounds for 35 cents. Today 2 pounds cost about $7 (up here in high-price New York). That's inflation by 20x. Gold is worth only $420 by that. The best hamburger runs 2 pounds for $10. Gold is $600 by that measure.
Which is better to use, T-bone or hamburger (or round steak for that matter)? In my earlier article, I mentioned T-bone steak. That is why I chose it here before searching for the 1920s meat prices. That's not much of a reason for using T-bone. A T-bone steak is a higher quality meat item. It is not sold that often as a loss leader. The regular T-bone buyer has some dough and is a stable buyer. Anything can be ground into hamburg, but there are only so many T-bone steaks that can be cut from a beef loin. This keeps the supply more stable. If these are not reason enough for choosing T-bones, then in desperation, I say that it seems to work. I am not above rank empiricism.
It is helpful to confirm the relation between T-bone steak and gold by using free market prices. In the mid-1970s when gold was in more of a free market, it was about $125 an ounce. Kitco has an excellent data base of these prices here. T-bone steaks sold for $0.89 in the late 1960s at an economy meat market (they were 59 cents in the 1950s.) Perhaps $1.25 is a normal price for the 1970s. Gold was 100x the steak price. Given today's T-bone prices of $8—$10 a pound, gold is worth $800—$1,000.
Hence is born the T-bone steak indicator. It uses T-bone steak as a numeraire. Gold's worth is 100 times the dollar price of a pound of T-bone steak.
This bit of history and T-bone home economics suggest to me the following. As the dollar depreciates further and the dollar price of T-bone steaks rises, gold will continue to rise in price approximately in line with the price of T-bone steaks.
If you'd like to stock up now on a lifetime supply of T-bone steaks at the current price of $8—$10 a pound because you expect them to soar in price due to high inflation, then consider buying gold and storing it for future use. You can then convert it back to inflated dollars later.
Gold is about $860 an ounce. For $8,600 you can buy 10 ounces (using the GLD security since coins seem to be in short supply due to a recent rush of demand). This is enough for 860 T-bone steaks weighing 1 pound each. If you eat one steak a week, that's a supply that will last you 16.5 years.
There are other alternatives for storing wealth, including other kinds of real assets (metals, jewels, art, land, buildings, businesses, books, antiques, patents) and other paper assets that pay returns. Comparing gold to these alternatives is another matter indeed. It is a job and a half, and I don't do it thoroughly. I only briefly mention some issues.
With gold, one has to think about confiscation. There are storage costs, and it pays no interest. One pays a small spread in buying and selling it. One has to think about its price being fixed by fiat, which is a form of confiscation. Its great virtue is that it maintains the purchasing power of one's wealth, as long as it is not confiscated. Buying gold anonymously would be ideal so as to avoid seizure.
With many other real assets, there are higher transactions costs. With diamonds, one buys at retail and sells at wholesale. The spread is large. One has to pay taxes on land. Paper assets such as stocks and bonds have low transactions costs and pay a return. Storage costs are very low. These are distinct advantages. Stocks have maintained partial value in past episodes of high inflation, like half their value. This means they have lost half their value in real terms. They are obviously volatile. Long-term bonds suffer badly in unanticipated inflations. Short-term credits are much better since they reprice over short periods. Lately, however, the highest quality short-term issues have negative real returns. Taxes are always another thing to factor in for all these assets.
All things considered, gold is a very good way to store wealth and secure it against a high inflation. Many of us will be happy merely to maintain purchasing power in such a situation and not worry about earning no real return. In The Battle for Investment Survival, which is on my short list of the best investment books, Gerald Loeb, who was familiar with the severe continental hyperinflations, observed that many of us would be happy to pay a fee to maintain purchasing power of wealth. Inflation and taxes are wealth-confiscators. Loeb knew that one had to battle merely to preserve wealth. He wrote those words many decades ago. The truth of them is even more evident today.
October 13, 2008
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.
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