By Mario, Innecco,
Money or currency is never a simple topic even though it should be. Back on November 19, 1967, Prime Minister Harold Wilson said the following after the pound was devalued by 14.3% versus the then “good as gold” dollar: “It does not mean, of course, that the pound here in Britain, in your pocket or purse, or in your bank, has been devalued.” Technically he had a point as the pound in the foreign exchange market dropped from $2.80 to $2.40 but what he did not explain to the public is that the purchasing power of the pound would drop in the coming months and years. The rising prices of the 1970s or what is also known as inflation was a direct consequence of that 1967 devaluation.
Today we will look at how our current political class has been devaluing the pound for the last couple of decades. Nowadays, currencies are not indirectly pegged to gold via the dollar like the pound was in 1967 as on August 15, 1971 President Nixon detached the American currency from gold. Why is gold still so important you might ask. I’d say that gold has been one of the best measures of wealth in the last few thousand years and despite our political and central bank masters saying gold is not important anymore we will ignore them. After all central banks still hold around 36’000 metric tonnes of the barrows relic as a reserve asset.
So what do house prices have to do with gold? Until 1914 £1 and one gold sovereign were the same so a £1 banknote was just a bearer instrument with which you could turn up at a bank and demand payment in gold or a sovereign. Nowadays bank notes, despite the promise to pay by the Bank of England cashier, are an empty promise. Unfortunately, the currency we used has been gradually detached from reality or gold. The first step was in 1914 on a domestic basis and the final one was in 1971 on an international basis. I do not have to tell you about Britain’s obsession with house prices and the fact that buying one’s “castle” has become harder and harder, especially for the younger generations.
We are told that houses have become unaffordable because of lack of supply or too many immigrants moving into the country and that might affect prices somewhat but I would say that the constant devaluation of the pound since the beginning of the 21st century is the biggest culprit. Back before 1971, devaluations were not constant, the 1967 devaluation was the first one since 1949 so what that meant is that our currency had a semblance of stability as it could not be created willy nilly as it needed a corresponding amount of gold to match the increase in supply. There have been some other property price booms other than the current one but we will focus on the latest one that has, in my opinion, been ongoing since around 1997. There have been some crises in the meantime like in 2008 and in 2020 but every time our governments, with the help of the money printers at the Bank of England, have made sure that house prices keep rising.
What we will look at now is the Nationwide average U.K. house price to gold ratio. Don’t worry it is not rocket science. All this ratio means is how many troy ounces of gold one needs to buy the average U.K. house. Why gold? Mainly because as we saw earlier gold is still the premier measure of value and central bankers still care to hold thousands of tonnes of it so why not look at house prices in terms of gold? First, let us have a look at the price of gold and houses in pounds since 1952.
What we can notice in both charts is how both were fairly stable until the early 1970s also took off after the turn of the 21st century. After August 15, 1971, the previously “good as gold” dollar was no more, and as a consequence, the pound was now also not as ‘good as gold” and politicians with the help of central bankers could borrow and spend without limit. This inflationary policy really took around the late 1990s and is it any wonder that we are now seeing massive price rises for our basic necessities like food, energy, and shelter?
Let us go back to the NWAHP/gold ratio now as it will show us that what we think is the increase in the value of houses is nothing more than the massive debasement in the pound in our pockets and purses. What has happened since 2004 when one needed 672 troy ounces of gold to buy the average house is that the fold price has moved higher quicker than then house prices which means the real value of houses has gone down despite the fact that the average house cost has moved from around £152k in 2004 to around £260k to the present day. The ratio now stands just above 160 and the average since 1952 is 242 while the low was 90.87 in 1982.
So what has happened since 2004 and why has the price of gold moved so much faster than the average house price? My opinion is that we have seen the government and the Bank of England push their inflationary policy to the limit via deficit spending (more debt) and money printing and gold is warning us that the pound is in terminal decline and that is one of the reasons why we are seeing the cost of living rise and the consequences of that are strikes, unaffordable housing, higher taxes, and increased poverty. Just to give you an idea the UK Government's debt has increased from around £300 billion in 2003 to around £2’800 billion while the Bank of England has printed almost £1’000 billion out of thin air (Quantitative Easing). What can we do? I’d say knowing what is really going on is the most important thing. In my next article, I will go over what I think one can do to protect oneself and loved ones in the coming maelstrom.
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