Fear Can Be Costly
July 29, 2011
What’s the price of fear?
I don’t know, but I think the price of gold is the closest thing we have.
It is $1,622 an ounce as I write this.
This is up 530 percent more or less from the low of the year 2001.
Inflation in that time has been 23 percent. In other words, prices today are 23 percent higher than they were in 2001. The online calculator I used only goes to the year 2010.
Some people believe gold is an inflation hedge. I can even make that case, but a hedge is supposed to be some sort of offset.
A 530 percent gain does way more than offset a 23 percent rise in prices.
Some people say that government statistical measures of inflation understate inflation.
If we believe that and say inflation was three times as high as the official statistics show, we get a rate of 69 percent.
That’s still a far cry from 530 percent.
This, I think is where the price of fear comes in.
We don’t know the future. Some people fear terrible things are coming.
Gold behaved similarly at the outbreak of the American Civil War in 1861, when federal paper money was introduced.
The federal government’s finances strained by the demands of war set off an inflation.
The price of gold soared. It was traded in the Gold Room of the New York Stock Exchange.
Traders would bid for $100 in gold coin, or five $20 gold pieces.
By the time the Battle of Gettysburg was about to be fought at the beginning of July in 1863, people feared a Union loss.
Gold was up 150 percent from the 1861 price. It cost roughly $250 in paper money, greenbacks, for every $100 in gold coin.
They were up by 37 percent in two years.
That was quite an overshoot. I expect that was the price of fear in 1863, but it is still not nearly on the order of magnitude of the present overshoot.
Are we pricing fear higher today than our forebears did then?
It sure looks that way.
Something to add? Notice an error? Comment on this blog.
About the Author