Why buy gold: The historical appeal - 1560 onwards!

Gold has held its value for centuries. But why? This video explores the historical price of gold, its purchasing power over time, and why we’re in a secular gold bull market. From the classic gold standard to today’s currency debasement, history shows that gold thrives when money creation is rife! Is now the time to invest? Watch to find out!

The Historical Context of Gold's Value

The history of the gold price gives us important context for where we are today and why we’re in a secular bull market. That doesn’t necessarily mean now is the right time to buy, but there's no doubt that gold remains in a long-term gold bull market.

This idea is well illustrated by this chart from a fabulous book called The Golden Constant, originally written in the 1970s and updated in 2007. The chart, which goes all the way back to 1560, presents three key data points:

1. The price of gold
2. Wholesale prices (commodity prices in general)
3. Gold’s purchasing power relative to those commodity prices

In other words, the third line measures how much gold can buy in terms of goods like wheat, copper, and other raw materials. What’s remarkable is that gold’s purchasing power has remained broadly unchanged over centuries. What an ounce of gold could buy in the 1500s, it can still buy today.

Purchasing Power of Gold: UK 1560 - 2007

Why Gold Holds Its Value

This is one of gold’s most important qualities. There is only so much gold in the world – you can’t simply create new physical gold. You can dig a bit out of the ground, but not much of that happens, there isn’t much in the ground, and most of the world’s gold is already in use in some form.

In that sense, gold is like the original Bitcoin. There is a finite amount, and as money is debased through excessive printing, gold tends to rise in value, maintaining its purchasing power.

Long-Term Price Cycles

So with that historical context, you can see on the chart below that gold experiences great price waves. You get long periods of stability in prices. You can see this, going all the way back to 1200 CE. For example:

• The Enlightenment Equilibrium, around the 1600s-1700s
• The Victorian Equilibrium in the 1800s.

Prices in the UK were essentially unchanged in the 1800s. You could buy the same basket of goods for one pound at the time of the Napoleonic War as you could in 1900 – prices were unchanged over 100 years. There was stability in the monetary system, there was no currency debasement. And that’s because we had the classic gold standard in the 1800s, which restricted the government's ability to create money, anchoring the price for 100 years.

The Great Wave: Price Revolutions and the Rhythm of History

But then we have price revolutions, which follow periods of equilibrium. We had one in the16th century, another in the 18th century, and the one we're in today. Money is debased and we get inflation. This at the heart of gold's appeal. It is a counter to inflation and currency debasement. It holds its purchasing power.

UK Price Level (index, underlying data for RPI)

UK BoE Residential price index

Gold’s Role in Today’s Economy

I believe this is critical, because when you look at prices today, you can see what's been going on in prices, or indeed in in terms of house prices in the two charts below. We've had an acceleration of prices over the last 50 years, and we saw more of that in the pandemic.

So the guts of gold is currency debasement. Sometimes when you have currency debasement, governments print money, and most of the time you end up with inflation. Sometimes it happens in response to deflation. But gold does well in both environments. Whenever you print money, gold does well. 

Learn more

For an update on our trading views on Gold (i.e. the 1 – 4 month outlook), take a trial of Longview Economics research and email info@longvieweconomics.com and we’ll send you this week’s update on our 1 – 4 month trading view by return. Trialists can also access the recording of the full Gold webinar which was held last week.