Saturday, June 5, 2010

Gold vs. The World's Oldest Money

Cattle are the world's first and oldest form of money.

The ratio in the chart shows one troy ounce of gold to one troy ounce of Tennessee All Beef cattle.

Gold traded at $697 in 2007. Gold has risen 75% since then. Meanwhile, cattle prices have apparently gone pretty much nowhere. That would imply that we are now off the chart when trying to come up with a current ratio.

It is just my opinion of course, but I continue to believe there are much better things to be hoarding than gold right now if all you are trying to do is preserve your wealth.

Source Data:
USDA Cattle Statistics (pdf)
USGS: Historical Mineral Prices


Stagflationary Mark said...

As seen in the cattle statistics offered in the link above, cattle prices rose 279% from 1967 to 2007.

However, the government's statistics show that consumer prices rose 521% over that period.

BLS: Historical CPI

So much for the theory (on sites such as shadowstats) that the government "always" understates inflation and understates it big time.

We are a service economy now, much to my dismay.

Perhaps hoarding "stuff" (like aluminum, cattle, gold, or even real estate) in a world already filled with too much stuff won't even protect us long-term from rising service inflation (as seen in medical services and tuition in particular).

How does one actually hoard services? The only thing I could think of that was even close was buying TIPS and I-Bonds, hopefully before others did.

Just a thought.

Stevie b. said...

Well Mark, no offense, but to justify your myopia on gold you really are now clutching at straws! At least you're trying to be consistent, I'll give you that - consistent but increasingly desperate IMHO.

How practical is it today for us all (and there are a shed-load more of us now than there were in 7000BC) to have a cow or 3? What relevance does the last few decades have in the overall scheme of things? We eat too much meat. Cows fart too much. Global warming could mean cow numbers may eventually be restricted, perhaps sending cow prices into the (apparently cooling) stratosphere. Who knows!

I'd also point out that BC (as in Before Cows) there was barter. I doubt today's world would function solely on a goods/skills exchange without some neutral, universally accepted medium of exchange. And guess what, I'm not talking about cowrie shells....!

Stagflationary Mark said...

Stevie b.,

How exactly am I desperate? I neither own gold nor do I short it. I simply continue to point out the risks of owning a shiny yellow substance that costs upwards of $21 million per cubic foot as a long-term store of wealth and/or as seen in recent years as a road to riches.

To think that gold should not be growing exponentially more valuable to us than food, the modern miracle of aluminum, and/or even toilet paper is a sign of desperation? Seriously?

That said, the higher the price goes relative to the other things in my life that I can actually personally use (and do not require being sold to others to capture the gains) the more I shall continue to heckle it, just as I did with dotcom stocks in the late 1990s and real estate since 2004.

I could of course be wrong to do so. Have you ever considered that you might be wrong though? Or is gold a "sure thing" at any price?

sobers said...

I hardly think a graph comparing cattle prices to gold covering the last 40 years is relevant, when you have entitled your post 'Gold vs the World's Oldest Currency'. Any idea how much gold you needed to buy a cow in 1900, 1500, 1000, 1000BC etc etc? If you had that data, and we were still well outside of the historical ratios, then I'd agree with you. Otherwise we are no further forward.

Stevie b. said...

Mark - only total twonks think they can't be wrong. Any very modest success I had in my Wall St. career was predicated on an expectation that I could always be wrong and how to manage that risk.

I don't want you to misunderstand me. I am not a goldbug. I cannot stress enough that I want gold to go to ZERO. I worry that all the other measly assets I have could be (one way or another) on the way to zero instead, and that's why I have attempted some balance with gold.

You're a smart lad. I can't see why you can't see the logic of all this...?

Stagflationary Mark said...

Stevie b.,

I would also remind you of something I said in my last post.

"If you absolutely must own gold even at these prices, then at least buy as much gold as you can for your money."

Although I do think gold is overpriced, I at least offered my opinions on how to buy it smarter than some. I doubt many others who are bearish on gold would have offered that. If Yahoo message boards are any indicator, they would simply be slapping a "Sell this pig!!!" on it in hopes of making a quick profit.

None of this is personal to me by the way. You are at zero risk of offending me.

In fact, I wish all of us could discuss it over dinner. If the topic became heated we could simply switch to something else, like China, lol. :)

Stagflationary Mark said...


I will make every effort to fulfill your request. No new posts until I either succeed or admit defeat.

Stevie b. said...

Mark - constructive dialogue is great, even if sometimes it appears one of us is no further forward!

Hadn't actually read your previous post before commenting on this one. Going there now.

Stagflationary Mark said...


I declare partial success. I think I can offer a ballpark estimate from the year 1880. The Internet is a wonderful thing.

Gold! How the Search for Riches Drove Development After the U.S. Civil War

In the early 1880s, the price of cattle rose to fifty dollars each, and many cattlemen became rich.

What is the Historical Price of Gold?

1880: $21

2.38 troy ounces of gold was worth the same as one cow.

The Texas Longhorns

Average weight for cows ranges from 800 pounds up to 1200 pounds, steers at 4 to 5 years should weight 1000 to 1200 pounds when fat.

Let's call them 1000 pounds (since cattle drives tended to burn calories).

That would mean that the typical cow was about 14,600 troy ounces. One ounce of gold was therefore worth about 6,130 troy ounces of cattle (about 40% of one cow).

The gold to cattle price was therefore roughly 6130 to 1. This would put the ratio at the lower range on the chart (meaning that cattle were more expensive relative to gold). That would seem to make sense. As seen in the link above, the prices of cattle were high enough to make many cattlemen rich.

It was also similar to the ratio seen in the mid 1970s and the early 2000s (when gold was cheap relative to cattle).

I estimate the current gold to cattle ratio at roughly 23,400 to 1. One ounce of gold is now worth about 1.6 cows. That's about 4x more than it bought in 1880. In my opinion, either gold is either very expensive and/or cattle are bargain priced.

There's some room for error here, since I am using the futures data to estimate the price change in cattle since 2007 (the last data point of cattle pricing in the USDA link). These are just ballpark estimates of course.

Stagflationary Mark said...

Here's an update to my current estimate of the ratio.

Improved prices have cattle farmers smiling again

Eldon Cole, a cattle expert with the University of Missouri Extension Center in Mount Vernon, said, “The local cattle business has been in the doldrums for the last three years. We had been told that our situation was not going to change until the world and national economy got better. We were told not to expect any relief until 2012 or 2013 for better consumption of beef.

That would back my original estimate that 2010 is similar to 2007 as far as cattle are concerned.

Feed cattle are a good barometer of what’s happened to the market. After the January run-up, beef prices were approaching a $1 a pound when they had been closer to 80 cents a pound. It’s now about 90 cents a pound, Cole said.

It's hard to compare apples to apples here, but it looks like my original estimate of 23,400 to 1 is fairly close.

GawainsGhost said...

Hmmmm. "Cattle are the world's first and oldest form of money."

I thought it was sex.

Stagflationary Mark said...



Well, few realize that the "world's oldest professional" banker was breeding cattle "at essentially no cost", or was at the very least credibly threatening to do so, lol. ;)

GawainsGhost said...


I haven't gotten into this whole gold debate, because I know that both sides are too firmly entrenched. But this is what I think.

Gold, silver, copper, aluminum, what have you, only has intrinsic value as an industrial metal. That is, to the extent it can be put to productive use. As coinage, it only has perceptive value. That is, to the extent people believe it's worth something.

In a economic catastrophy or severe depression, precious metals really don't have any value, as they cannot be put to productive use.

Farmable land, cattle or other animals, however can. People do need food, you know.

Stagflationary Mark said...


"I haven't gotten into this whole gold debate, because I know that both sides are too firmly entrenched."

The higher the price of gold goes relative to productive assets the less value I will see in it and the more those who own gold will believe in it.

Behold the Great Trenching Experiment!

EconomicDisconnect said...

Wow this one is a good one!

Banking and prostitution are the oldest professions, ironic yes?

Some old "money" includes:
-huge stone discs that could not be moved

Mark makes good points about gold. Gawains makes a good point about the industrial usage of metals, and silver is used plenty in industry and has been "used up" quite a bit, which is also a positive for Ag.

I have written plenty on why the metals are good, and at this point it is put up or shut up time. A huge market sell off (I think it likely at this point) will either drag gold down like last time (Mish sees gold at maybe $680 in this case) or a final decouple could happen. If the world ends up needing to put some kind of tether on money to some "value" gold and maybe silver will be a part of that.

Long term I think gold is a great "store" of value and buying power and I do not think that can really be debated. Short term indeed it could be overpriced, but it has yet to have a Nasdaq type take off.

I think 5% - 10% of a portfolio in metals is a good balance. I am overweight the metals (25%) but I never recommend over the 5-10%.

What does give me pause is how plenty think gold can only go up. If things turn south there are going to be quite a few pissed off people who thought they had a "sure" thing.

I think Im done now.

Stagflationary Mark said...


Nice summary!

I think it all comes down to this.

Beauty, like supreme dominion
Is but supported by opinion
- Benjamin Franklin

No two people are ever going to agree on the exact true value of gold. Its worth is based almost entirely on beauty. As I have said in the past, it can feel hypnotic in one's hand.

The collective opinions of everyone other than the holder determines its resale value though, and that experience can either be pleasant or cruel.

For me, owning gold was a pleasant experience. For you, it is currently extremely pleasant.

Those who feel gold is worth any price may someday find the opinions of other rather cruel though.

Our bird was at the vet recently and my girlfriend asked the receptionist how many "rescue" birds they've been seeing lately. The number was enormous. I think it was like 700 or so.

She didn't judge these people harshly though. She said that if given the choice between caring for a bird and feeding their children it was fairly obvious what was the more responsible thing to do.

I'm sure many of these people loved their birds just as much as some love gold. The economy has basically forced them to sell though.

I think about this every time I see a "Cash for Gold" ad.

It's deflationary.

Calculated Risk: Silver, Gold, and the Hunts Brothers

I don't follow gold, but back in the late '70s I was long the silver market. I closed my positions when housewives started selling the family silver...

That's the risk. I've thought about this since 2004. What would happen to the price of used bicycles on eBay if the economy really turned bad? We have so much "stuff" in self storage units spread all across this country that I would definitely not want to be selling a bicycle when others were trying to raise cash to pay their bills.

I think this same concept can be carried over to all hard assets. That's one reason I still lean deflationary.

Just random thoughts.

EconomicDisconnect said...

700 birds? Is that a big metro shelter? Seems high but I really have no idea. My mom and her boyfriend took in a cockatoo one time that had been abused and it was pulling out its own feathers! After 2 years she settled down and became a great friend of the family's.

The value of anything is always what someone else will pay.

GawainsGhost said...

Interesting interview with Karl Denninger on Two Beers With Steve (linked via Market Ticker) today. I find his thoughts on the economy interesting.

Karl believes that gold is at its high. So now is not the time to be buying but selling. There will be a correction, there always is.

From my perspective, I tend not to run with the pack, follow the herd. Anytime I see or hear something being excessively hyped, I tend to stay away from it.

If you had asked me a couple of years ago about buying a house, I would have told you to save your money and wait. This is true. That's what I told my friend Omar when he wanted to buy a new house in 06. He took my advice, waited two years, saved $30,000, and ultimately was able to buy a 2-story, 4 bedroom, 2.5 bath house in a golf community with pool priveleges for $150,000. 20% down on a fixed-rate mortgage. That's the way you do it. He's happy, living in the house of his dreams.

It's the same with any other investment, be it stocks, precious metals, whatever. People tend to think investing is about price--buy low, sell high. It's not. It's about behavior.

If you panic and sell at the wrong time, or if you panic and buy at the wrong time, you're going to lose big. Prices fluctuate. The time to sell is when everybody's buying. The time to buy is when everybody's selling.

The real money is making money. Wealth is accumulated by investing money into productive assets. Wealth is destroyed by wasting money on nonproductive assets, more accurately known as liabilities.

It really is that simple.

Stagflationary Mark said...


The value of anything is always what someone else will pay.

My canned goods and toilet paper have value to me and will never require someone else to pay me for them. Similarly, my I-Bonds and TIPS held until maturity do not require me to ever find a buyer.

I don't know any of the details about the 700 birds. It is a major metropolitan area though and there are not that many bird vets. I don't even know the time frame so it is hard to grasp what that number means.

Here's a sad story from the other side of the state to give you some idea though.

Cats and Kittens Overwhelm Local Shelter

Over the last seven days Spokane County Regional Animal Protection Service has received over 100 cats and kittens which compares to the same week in 2009 when SCRAPS received 64 cats. This is a 56% increase in intake when compared with 2009.

100 cats and kittens in just 7 days. It is a MUCH smaller city than Seattle.

GawainsGhost said...

That is sad.

I've been to repos where people just left their dog and abandoned the home. A cat, if it's not locked inside, can usually survive. But a dog will wait, until it dies.

To me, this is the most inexcusable form of inhumanity. Abandoning a pet is like abandoning a child. No real man or woman would do that, regardless of the circumstances.

Stagflationary Mark said...


I tend to look at what things are worth to me personally, and try not to think much about what they are worth to others.

I live in a fairly nice house. People could just assume by looking at it that I require something approaching the best. In reality, I actually just wanted to bypass the "starter home" and not buy until I could find a house I'd be happy with permanently. Buying and selling real estate can be expensive and I had no desire to play that game any more than necessary. One house and done was my plan. So far, so good. I've lived here 13 years so far.

What people don't know is that I lived in this house for 7 years before I even bought a dining room table. That room just sat empty. 2004 seemed like as good as any time to buy one though, because I was simply running out of investment ideas. It was also a decent time to buy, because furniture stores were somewhat desperate that Christmas.

What people also don't know is that I bought quite a bit of my neighbor's furniture for just $400 (4 pieces). They wanted something nicer and I thought what they had was plenty nice.

What they also don't know is that there is a 14 year old car sitting in the garage. It still runs fine. I think I might even be able to get that car to antique status someday, lol.

When the investment that retired me paid off I splurged on exactly one item. I bought a baby grand piano at Costco. It was a luxury that I always wanted. That was the extent of my spending spree. I still own it and will no doubt own it for many years to come. On a dollars per year basis, it was an excellent value to me.

A friend made far more than me off that investment and from what I hear, it is pretty much all gone now. His spending sprees never ended. Easy come, easy go.

Stagflationary Mark said...


One of our neighbors moved out and just left their cat behind to roam the streets.

The sad part is that it was the second time. That cat was already rejected by another neighbor of mine.

The goods news is the one neighbor moved away.

The bad news is that the other neighbor is still living next to me. That neighbor almost left, but he thought he could get $600k for his house well after the market started down and there were simply no buyers at that price. Duh!

One of my other neighbors joked to me at the time that she was thinking of offering cookies to potential buyers. I think you can pretty much guess her opinion of him, lol.

GawainsGhost said...

Well, my family has lived in these condos since 1969. We own two of them, one for me and one for my mother. Both are paid for in full, so we won't be moving anywhere anytime soon.

I drive a 1993 Ford Ranger, with over 220,000 miles on it. Last month, I had to spend $1300 on repairs for it. I didn't care because I need it to carry signs around. Not to mention some of the subdivisions I have to go to are not exactly where you want to be found with a new car.

I do have a shiney new Mazda RX-8, fully loaded. It's the only thing I've splurged on in the last ten years. But I hardly drive it. Just keep it covered until I have a date or want to go to a Cowboys game.

I also have several tailored suits, just so that I look good, but I don't wear them very often. Only when I'm out and about. I'm certainly not going to wear them into the oven that is an un-air conditioned repossessed home.

Other than that, the only thing I invest in is my company. The way I figure it is this. As long as I keep my mother alive, and the more houses we list and sell, the more money the company will be worth when we're ready to sell. In say twenty years, I'm looking at around at least $10 million (company name, listings, land). That would be cash.

So there's a lot of things I can complain about, all the work involved, but I don't. I just keep doing what I have to do. And waiting to reap the reward.

Stagflationary Mark said...


May it all work out well for you.

If it even pays off a fraction of what you think it will, you should be in great shape to enjoy your retirement.

I'm easy when it comes to retirement. I could easily give up the Internet, the TV, and yes even the Playstation 3. Heck, I still don't even have a cell phone. I'm probably one of the last holdouts, lol.

There so many things that interest me that don't require money, from playing with the dog to reading a used book. If people haven't figured out by now that the very best things in life are mostly free, then I can't really help them.

This new economy is and will be rough on those who feel "entitled" to all of the very best things in life though, not that I will have any great sympathy for them.

Stevie b. said...

Mark - where's he going wrong?

Stagflationary Mark said...

Stevie b.,

"People call gold a bubble when it makes a 20 year move from $850 to $1219. Now this is positively amazing. What other asset class would be described as a bubble when it has underperformed inflation over a 20 year period? I suspect only an asset that, for whatever reason, is lightly regarded by the general public."

Well, that's certainly an easy one. Silver was definitely in a bubble in the early 1980s. Investors were slaughtered. Silver underperformed inflation for FIVE HUNDRED YEARS prior to that though. It seems they forgot to factor in the enormous size of modern day mining equipment.

"It is logical to think that all assets would rise more or less in unison in a growing economy that is constantly experiencing price inflation. However, this is not the case. Gold has underperformed GDP by a wide margin over the last 20 years."

No, it is not at all logical to think that. Not even remotely.

First, all assets do not move in unison even long-term. Once again, see the 600 year chart of silver in the link above. Aluminum has also performed poorly for the last 100 years, as have cattle prices and anything else we can associate with productivity miracles. A clear loser being semiconductors used to power this text.

Second, since when does GDP represent inflation? That's complete nonsense. As our population grows our GDP also grows. Just because my neighbor builds himself a house to live in (and therefore contributes to GDP), that does not necessary mean mine will go up in price. Real estate speculators just found that out the hard way.

Stevie b. said...

Mark - maybe Jesse says it pretty well...

and the point might be that "what we are witnessing is a generational monetary phenomenon", not a 100 year this or a 500 or 600 year that...

Maybe this is gold's last hurrah, but personally, I doubt it...

Stagflationary Mark said...

Stevie b.,

You will note that most of my bearishness has little to do with gold's price in dollars.

I would not trust dollars over the next 500 years, so in that respect I completely agree with you.

It has to do with gold's price vs. things we actually need and use.

There is one thing we can agree on though.

I doubt this is gold's last hurrah. I very much doubt it. I have absolutely no idea where it might peak or if indeed it will peak, any more than I knew when dotcom stocks would peak or real estate would peak. Gold to $2000? Gold to $5000? No idea. All I know is that it has little value to me, personally, at even $1000 because it is SO expensive now relative to toilet paper.

The key is what happens in China to me. As much as you love gold, I have no doubts that they love it more. They also fell in love with stocks and real estate. Their stocks got the bejesus knocked out of them though and I suspect their real estate is next.

Here's another problem with gold. It is 7 times more common than platinum and platinum actually has a use in production.

Platinum will always be more valuable to me than gold. We're supposed to be scared of owning platinum though, because it is used in the auto industry. We're not supposed to be scared of gold though, since it has virtually no industrial use at all? Seriously?

Stagflationary Mark said...

One more thought.

I did buy gold in 2004 mainly because I was scared of platinum's use in the auto industry AND because platinum was 100% more expensive than gold.

If I was forced to buy either platinum or gold right now, then I would definitely buy platinum. It is now only 22% more expensive than gold.

I'm not buying either though. I'm bracing for commodities to get spanked again (as I continue to have a deflationary bias). I might be wrong to think this way, but that is what I think.