|

Using the ‘Beer Price Index’ the all time inflation adjusted high price of gold is £3730

We’ve all seen charts depicting the price of gold spanning the past few decades inflation-adjusted to today’s prices. When this is done the all time high from 1980 in sterling terms is £1300.

(click for sharper image) 

But there is a problem when using the CPI or RPI to try and work out what prices from the past would be today. Both those measurement are deeply flawed and manipulated measures. After all the UK government bases how much to increase pensions and other benefits using these measurements.

In other words the government has a direct vested interest in keeping those figures as low as possible.

And here’s the proof, last week the government announced that it was considering stopping increasing benefits inline with the CPI:

Reports suggest the government is considering changing the way many benefits are calculated each year, so instead of annual increases linked to inflation they would be pegged to the rise in average earnings. But the BBC suggests that before any increase there will be a two-year freeze in benefits payments.

And we’re not talking about small change here either:

In recent years inflation has risen at a far higher rate than average earnings. Whitehall officials say a switch since 2008-9 would have saved £14bn

So clearly the government has a vested interest in keeping the CPI and/or RPI as low as possible. And just to show this isn’t UK specific, here is Argentina being caught red-handed manipulating their inflation data:

Argentina is on track to be the first country ever censured by the International Monetary Fund for not sharing accurate data about inflation and the economy.

The IMF’s board of directors, meeting yesterday in Washington, gave the country until Dec. 17 to respond to concerns about the quality of its official data, it said today in an e-mailed statement. If the deadline is missed, the board can issue a declaration of censure, a warning that has never been used and which means sanctions may be applied if the concerns aren’t addressed.

“The Executive Board regretted the lack of sufficient progress in implementing the remedial measures since its Feb. 1, 2012, meeting and expressed to the authorities its concern that Argentina has not brought itself into compliance with its obligations,” according to the statement. The board “took note of the ongoing dialogue between the IMF and the authorities regarding the measures, and called on Argentina to implement the measures without delay.”

But it’s not even that a government might be tempted to fudge the RPI or CPI numbers, it is the metric itself that we call into question. The methodology changes on regular basis, in-fact the ONS is going through another one of these rounds as we speak:

Britain will consult next month on whether to change its retail price index measure of inflation, the Office for National Statistics said today, which could lead to lower returns for holders of index-linked gilts and certain pensions.

“As a result of work to understand the reasons for the differences between the RPI and the Consumer Prices Index (CPI) estimates of inflation, the National Statistician is to invite users’ views on the way the RPI is constructed,” the ONS said.

The consultation starts on October 8, and any changes will be announced in January next year, to be implemented in March, the ONS said.

The ONS did not say what its preferred change would be, but instead listed options, ranging from doing nothing to moving the formula used to calculate the historic RPI rate fully in line with that used for the CPI measure favoured by the Bank of England.

To put it simply the way the CPI or RPI is calculated today is a totally different measure than it was 30 years ago. So to say the RPI rose 5% in 1980 and to compare that today is absolutely meaningless, you are now comparing two completely different things.

So why is this important? Go back to the chart at the top of the page. Back in 1980 gold in the UK hit a then record high of £371. When you use the RPI to inflation adjust £371 in 1980 to today you get a number around £1300.

In other words the gold price in the UK, which is currently around £1100, just has to put on another 20% to match the all time high from 32 years ago.

But there is a problem, if the RPI/CPI are constantly being changed how can we be sure that £1300 inflation adjusted price target is an accurate reflection of the loss in purchasing power of sterling over that time frame. The answer is you can’t.

So we thought it might be worth while to find another metric that can be used to inflation-adjust the price of gold to. Something that everyone can relate to, is easy to understand and appreciate.

And we think we’ve found it… Beer!

Back in 1970 the average price of a pint in the UK was just 10p. Today the average price of a pint is about £3.17 (London readers can only dream of such a ‘cheap’ pint).

Which means that since 1970 the price of a pint has increased an eye watering 3170% in 42 years.

Back in 1970 the price of an ounce of gold was £15. So if we increase £15 by 3170% we can get a ‘beer inflation-adjusted’ price of an ounce of gold, which would be around £476 per ounce in today’s money.

The rise of the cost of a pint in the UK:

(click for sharper image) 

Now let’s go back to that then all-time-high of £371 in 1980. The average cost of pint back then was around 35p. Which means that since 1980 the price of a pint has increased some 906%. If gold had increased at a similar rate the ‘beer inflation-adjusted’ all time high price of gold is in fact £3730. Price of gold using the Beer Price Index (BPI) instead of the RPI:

 (click for sharper image) 

Now what is interesting, and makes us think that the BPI is in fact a much better indicator of loss of purchasing power that the RPI or the CPI, is that the £3730 number ties up pretty well with our previous analysis on just where the gold price might ultimately head:

Comparing the gold bull market of 1970-80 to today:

Gold Made Simple ® has compared the bull market of 1970-1980 in gold with the current bull market. Its findings were:

  • During 1970-80 gold went from £15-£371, a 2500% increase
    • During 1970-80 the BoE increased its balance sheet (printed money) by 300%
    • During 2000-11 gold has gone from £180-£1000, a 555% increase
    • During 2000-11 the BoE increased its balance sheet 1000%
    For gold to match the bull market of 1970-80, gold should trade north of £4500

The full analysis with charts can be read here:

The relationship of the Bank of England’s balance sheet to gold:

Next Gold Made Simple ® has looked at the expansion of the Bank of England’s balance sheet and gold. It’s findings were:

  • Gold holdings at the BoE have collapsed over the past 60 years
    • Today the BoE holds 310 tons, in 1950 that figure was 2543
    • The BoE balance-sheet has been a vertical line straight up in the past 4 years
    • At £1000 per ounce just 4% of the nation’s money is backed by gold
    A return to the long term average of a 20% gold backed balance sheet would require a gold price of £4670

The full analysis with charts can be read here:

The relationship between the UK’s national debt and gold:

Finally Gold Made Simple ® has taken a look at the correlation between the UK’s debt and gold. It’s findings were:

• The UK national debt is predicted to be £1.314tn by 2015
• There is a strong positive correlation between higher debt and higher gold
• If gold repeats the 1980 peak, in debt:gold ratio terms, then the price of gold will have to reach about £5050

Who knew that beer would be so good at proving what a complete waste of time the meaningless RPI or CPI really are. Is there nothing it can’t do?

 

Link to this article: : http://www.goldmadesimplenews.com/gold/using-the-beer-price-index-the-all-time-inflation-adjusted-high-price-of-gold-is-3730-8092/

Posted by on Sep 24 2012. Filed under Gold and Silver Media, Gold News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.
  • Astrogeezer

    Webmaster @ Gold made simple.

    Would it not be a good idea to scan comments before allowing inbreds to post on the site?

    • Thanks for the heads-up… Whilst we don’t want to pre-scan comments to allow as much freedom of thought as possible clearly that now deleted comment didn’t really add anything to the intellectual debate!

Gold Investor Report banner

Recently Commented

  • Ome Lawani: Very soon the silver fix mechanism is set to change. What do you think will be the impact on the silver...
  • jack loach: Sods —– Law. May —- 2014. For almost two decades we have strived to get justice for the...
  • Steven Allen: Cost increases are probably down to factors such as: bigger festival keeping pace in probably a less...
  • jack loach: Sods —– Law. April —- 2014. For almost two decades we have strived to get justice for...
  • jack loach: Update — March. 2014. Pictet & Cie Bank —- List of Crimes. 1996 —–...