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Gold and How Prices Advance on a Logarithmic Scale

October 29, 2020 By Mircea Vasiu

Gold is the only form of money that has survived for millennia. To this day, people argue about gold being money or not, but it depends a lot of the people’s interpretation of money. 

While gold cannot be a unit of account, it does share one of the most important characteristics of money – store of value. Gold has retained its value over time, something we could not say about all the fiat currencies ever created.

When looking at a chart like the one below, one should always consider the currency too. In this case, this is the gold priced in $/oz. Does the chart reflect the parabolic rise in the price of gold or the incredible decline of the USD?

Gold as a Store of Value

Logarithmic charts display numerical data to respond to skewness to large values. Such charts are used to explain large market advances or declines, like the one in the price of gold against the USD.

If we replace the USD in the chart above with an emerging market currency (e.g., Turkish Lira – TRY), then the gold’s advance is even more dramatic. While gold appreciated against the dollar, the USD appreciated against other currencies. This makes the price of gold denominated in other currencies to increase even more.

An exchange rate expresses the value of a currency in terms of another. The same is valid when we talk about gold.

In 2020, the price of gold reached a record high against the USD. It broke the $2,000 on a steady USD decline as the Fed flooded the market with dollars in response to the coronavirus pandemic. This is one of the major milestones reached by the price of gold. However, in the grand scheme of things, it is literally a non-event. Looking at the chart above that shows gold’s price evolution since 1790, one thing is clear – every time the price of gold corrected, it was just an opportunity for investors to buy some more.

For this reason, it is recommended that any long-term portfolio has a portion invested in the price of gold. Some investors even build a cash position and hold it as speculative money, to be used when the price of gold declines.

The idea is that if history provides a clue about how the price of gold will perform in the future, owning gold would only increase the portfolio’s performance in the long run.