Gold, Silver, and Pepperoni Pizza

After graduating from college, I went to work at a production facility.  One of my co-workers, who was a few years older than I, made it a habit of his to purchase 5 ounces of silver every time he received his paycheck.  I thought this was a bit interesting, and we talked about this habit of his.  He must have been just enough older to have witnessed the attempt by the Hunt brothers to corner the silver market, or at least he knew about it.  He was convinced that someday silver would again be over $50 per ounce and that he would be able to sell and make a fortune.

Once, he took me on his ritual silver purchase.  We left in the morning after work (we worked the night shift) and went to a local coin shop.  Of course, he knew the proprietor by name and proceeded to shop for his requisite treasure.  He convinced me to join him on this treasure hunt and, upon our departure, I was the proud owner of 5 shiny round ounces of silver each with a different design from a variety of mints.  I remember thinking at the time that for my $5.20 per ounce, I could get 4 gallons of gas which were about $1.25 per gallon or a large pizza.  Later that year, I went on my way to further my education.  I have never seen nor spoken to my co-worker since, but I often wonder if he kept up his habit.  If he had, he would have approximately 2,400 ounces of silver.

I kept my meager little treasure in the original envelope with the original receipt from May of 1990 in my little lock box along with my other important papers. I hadn’t thought about it much until last year with gasoline hovering around $4 per gallon. Then I realized here almost 20 years later each of those little one ounce round pieces of silver would buy about 4 gallons of gas or a large pizza. The purchasing power of that silver had remained constant over all these years. Salaries hadn’t multiplied almost 4 times during those years, but that silver had. I could trade them in for exactly what I had could have gotten in 1990.

They say that in the 1800’s a $20 gold coin (which has 0.9675 ounce pure gold) would buy a nice gentleman’s suit. Today, in 2009 with the price of gold at $950 per ounce, I suspect you can also get a very nice gentleman’s suit (at least for me). Plus a pair of shoes, shirt, and tie to match. In 1890, the number of ounces of gold that it took to purchase the median US home was about 100. With the average daily wage of about $2, it would take 2 weeks to work for a $20 gold coin and 2 years to save up the number of ounces for a house (forget about living expenses for a minute). In the fourth quarter of 2008, the median home price was $180,100 and the median income was $61,500 in early 2008 or about $250 per day. When you take the median home price in $900/ounce gold, you find that it takes 200 ounces to buy that house. That seems expensive, as if gold has lost 50% of its value. But consider that it takes 4 days of work to buy an ounce of gold and at 240 work days for the year, you could get about 60 ounces of gold during the year. Thus it would take just under 2 years to save up the gold to purchase the house.

Gold has indeed held its value relative to the amount of time required to earn that gold. We all trade our time for money when we work. Some are able to get more money for their time because the perceived value of the work is greater. It is during these years when we are able to trade our time that we need to set aside funds for when we are unable (due to health) or unwilling (due to retirement and desire for free time) to work. While we are working, it may not matter as much that inflation is eating away our purchasing power provided we are able to increase our income through value adding activities. However, it is the time when we stop working at age 65 that we should store value for 20 years hence when we need 4 gallons of gasoline or would like a pizza. In 40 more years, when I am in my 80’s, the pizza is on me.