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Valuing Gold
By Alan Herbert

It's hard to turn on your TV set these days without being pitched to buy gold. One of the commercials stresses that "gold has never been worth zero." This is stretching the truth, since the first of our ancestors to discover the metal probably didn't know what to do with it. Value came later as uses for the metal were found. Everything, even gold, started with a value of zero. So, too, the U.S. dollar.

For part of the denomination's history it was backed with gold, and the dollar value rose and fell with the price of gold. It remains the standard as we can show with some hopefully not boring statistics.

To devalue the dollar, its gold value has to be raised. With gold currently fluctuating in the $800 to $1,000 range, this is an exercise in modern math. For example, the current official price of gold is $44.22 an ounce. This was a 10 percent devaluation on Oct. 18, 1973, when the figure was raised from $38 an ounce.

How did we get a dollar value for gold? One often sees figures giving the dollar value of gold as far back as the 13th century. Since the dollar didn't exist back then, just how did they go about figuring the dollar value?

The answer lies in another currency that existed and was relatively stable for the 500-year period ending when the United States came into being in 1776. The British pound varied only slightly in value between 1250 and 1776, so the value of the pound in 1776 dollars was used as the established base, or a figure of approximately $21.50 an ounce. In 1812 in the United States, gold was fixed at $17.777777 a troy ounce and silver at $1.074344648 a troy ounce.

Ignoring inflation, this pegged the price of gold in dollars at about $4.50 in 1250. It would also put the dollar value of an ounce of gold at $10 in 1492 when Columbus discovered America. The comparison includes: 1792 to 1834 - $19.39; 1834/1837 to May 12, 1933 - $20.67.; 1933 to March 31, 1972 - $35; 1972 to Oct. 18, 1973 - $38.

This would be a good place to remind you that devaluation is not done merely as a government whim. Congress has to approve the changes. For example, the Coinage Act of 1792 set gold at $19.39. The Acts of 1834 and 1837 set it at $20.67. The Gold Reserve Act of 1934 set $35, and the Smithsonian Agreement of 1971 raised it to $38.

All of this led to some odd sidelights. California gold was worth only $16 an ounce, when gold was priced at $20.67.

Pure gold was worth $20.67 a troy ounce, but gold dust or nuggets from California contained silver and other metals that reduced the actual fineness of the gold. After considerable discussion, the "average" value of gold dust from California was established at $16. This is one of the basic reasons why the Territorial coinage struck in California, Oregon and Utah was almost universally underweight and did not contain the stated amount of gold.

The U.S. gold $5 of the early 1800s was intentionally struck to match several foreign coins in value. Among them were the Portuguese 4,000 reis and two escudo, the French louis d'or and 24 livres, and the British guinea and sovereign. The U.S. gold $10 by contrast matched only a couple of low-mintage coins.

The basic purpose was to gain a wider circulation to profit from the increasing amounts of gold being discovered.

The 1849 gold $20 figured in many rumors, one of them valuing the coin at $100,000. The piece is unique and with a little stretch it might well have been worth that figure 100 or more years ago. But, the coin is a star member of the National Numismatic Collection at the Smithsonian, thus not for sale. The $100,000 figure probably came from a published comment from Farran Zerbe in 1899 that "if" the coin were offered for sale, "the rivalry among the wealthy collectors of the world would make that coin worth $100,000." Speculation, but a remarkable figure for that era. Today, the coin would bring multiples of $1 million.

If you've read this far looking for investment advice, my stated position is that gold bullion is a risky proposition. Gold coins are another matter. You have to remember that your lone ounce or two is competing with every central bank on the planet. The run up to the current level has benefitted only those who invested in gold when it was well below current levels.

Beware of unnamed experts who predict gold price rises without a specific time frame. My crystal ball is just as cloudy as theirs.


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