AUD Gold Price Exceeds Weekly Aussie Wage

The case is often made that Gold is an inflation hedge. However the volatile and cyclical nature of the metal shows that it doesn't practically work as such unless measuring over a long time frame.

For example suppose an individual had purchased some Gold in January 1980 right at the peak for US$850... did Gold keep up with inflation if this individual needed to sell some in 2001 at Gold's low point (US$250)? Of course not, in fact Gold hasn't even yet reached the inflation adjusted high after rising more than 600% from the lows (inflation adjusted high from 1980 is over US$2000). Gold is not practical as an inflation hedge over short time frames. However over long periods of time Gold does hold value in comparison to fiat currencies which continuously deflate in value as the supply is increased at unhealthily high rates.

There are examples from other commentators and authors showing that Gold has retained similar value over very long time frames (hundreds and even thousands of years) against livestock and against objects such as a fine suit. However the problem with this is you are taking two specific points in time to reach a conclusion that may differ if you varied the time frame selected by as little as a decade.

The reality is that Gold cycles in value against assets from overvalued to undervalued and back again (some would argue that it's other assets which cycle against Gold). Some of these cycles might be short term (such as the Gold/Oil ratio which I covered here) or medium term (such as the Australian property priced in Gold ounces, covered here). There are other (non-tangible) things that Gold cycles in value against as well. One of the most interesting I have covered on the blog before was an average Australian wage (see previous post here).

You can see the previous post for the data sources I have used (have spliced RBA/ABS data for wages). For wages I have taken the printed number from the last quarter in each year (as it's not volatile and generally is consistently rising), for Gold I have averaged monthly prices (AUD price) across the year due to price volatility.

Here is the average weekly wage of an adult Australian plotted against the annual (average) price of Gold in Australian Dollars since 1972:

Click Chart To Enlarge

As you can see on the above chart, the spot price of Gold in Australian Dollars has surpassed the weekly Australian wage for the first time since 1989.

Chart in log form (requested by obakesan):

Click Chart To Enlarge

And if we divide the price of Gold into the weekly wage we are presented with this ratio which shows Gold cycling in value against Australian wages (Gold undervalued as the ratio peaks and overvalued in the troughs):

Click Chart To Enlarge

As I pointed out the last time I calculated this ratio, the weekly wage has cycled between around 1/2 and 2 ounces of Gold for the best part of the last 100 years.

1901:

Based on the above figures from the ABS the Wage/Ounce ratio was around .51 ($4.35 wage / $8.50 oz) in 1901. Source

1920:

In 1920 the Pound was valued at USD$3.66, so in USD an Australian weekly wage was around $38.43 and bought 1.86 ounces of Gold. Source

If we took the peak monthly price (instead of averaging over the year) the ratio actually dropped to around .37 in January 1980 rather than the .42 by averaging the Gold price over the year. To get back to these ratio levels we would need to see Gold climb to AUD$3750 or AUD$3300 respectively, assuming the average weekly wage remained at $1391 where it is today. In my opinion either of these ratios is possible (I would suggest likely) within the next few years as Gold shoots to overvalued status against Australian wages.

Despite that I blog on a site which might suggest I am a permabull on precious metals, that is certainly not the case and when I believe that the metals have reached a cyclical high against other assets (and other indicators such over valuation against wages) I will be looking to move a majority of my positions from Gold and Silver related assets into income producing/productive assets.

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Tax free threshold allows tax free golden retirement

Note: I’m not a licensed financial advisor, taxation specialist or an accountant, so this information should be considered as an FYI only (NOT FINANCIAL ADVICE).

It’s been known for sometime that significant changes are coming to the tax free threshold for Australians in 2012 and it was confirmed again the other night in Swan’s budget.

From July 1st 2012 the tax free threshold will be increased to $18,200 (up from $6000 for the financial year 2011/2012) and will be bumped up to $19,400 by 2015-2016.

One of the biggest concerns for those saving for retirement in physical Gold is the potential for large amounts of capital gains tax to be payable in the likely event they sell at much higher nominal prices than today, even if the real value has simply kept pace with rising costs.

A high tax free threshold (coupled with the existing 50% capital gains tax discount for assets held longer than 12 months) opens up the potential for those saving for retirement using Gold to deplete their Gold savings during retirement sans tax.

Take the example of someone (let’s call him John) who has been saving in Gold for retirement since 1990 and has purchased Gold every month in equal quantities since that point in time. John’s dollar cost average is around $690 (AUD). With Gold currently trading around AUD $1600 each of John's ounces of Gold are sitting on $910 profit (average).

How does he avoid paying tax on the profit during retirement while keeping within the bounds of the law?

To calculate the maximum which John could liquidate in 2012/2013 for retirement we take his profit per ounce ($910) divide it into the tax free threshold ($18,200) which equals 20 ounces, we then double the ounces as tax is only paid on half of the capital gain (due to 50% CGT discount), so John could potentially liquidate 40 ounces for $64,000 and pay no tax on the proceeds.

Further explanation: Of the $64,000 funded by the sale of 20oz of Gold, $36,400 is profit, but he only needs to pay tax on half the profit ($18,200) and because this is below the tax free threshold he pays no tax.

It wouldn’t matter if he’d purchased the Gold at $1 an ounce and sold it at $1600 for $1599 profit…. as long as John:

- Holds the Gold longer than 12 months allowing 50% CGT discount

- Is comfortable retiring on double the tax free threshold (max)

Based on a $1 purchase price for Gold and $1600 liquidation price John could sell up to $36,400 worth of Gold and avoid tax using the same method. So for those worried about how high Gold might get in the future and the tax payable, as long as you can live comfortably from double the tax free threshold (whatever it is at the time of Gold liquidation) then you can avoid paying tax.

Warren Buffet once said “If you own one ounce of gold for an eternity, you will still own one ounce at its end”. Funnily enough this was in an argument to suggest reasons not to hold Gold, but those who save in Gold are often doing so for this very reason, to preserve purchasing power, with the expectation that over the long term Gold will be able to fulfill this need.

How much Gold would you need to save in order to retire? A little while ago I looked at the average weekly wage (before tax) priced in Gold ounces, here is the chart:

Average Weekly Wage Priced in Gold Ounces (Click Image to Enlarge)

Basically an average weeks wage has fluctuated between ½ and 2 ounces of Gold even dating back over 100 years. This example from the previous article, showing the ratio was .51 (number of Gold ounces the average weekly wage would buy) in 1901:

In 1901, the average weekly wage for an adult male was about $4.35 for a working week of almost 50 hours, which after inflation equates to $217.50. However, wages have grown much faster than inflation, with the average weekly ordinary time earnings for adult males in May 2000 being about $830.00 for around 37 hours work, in far better conditions.

The price of gold has often been used as a measure of inflation. At Federation, the price of gold was $8.50 an ounce, or $425.00 in today's money. The actual price of gold in 1999-2000 averaged about $460.00 an ounce, showing that it has generally maintained pace with inflation. ABS

If we take the midpoint (1.25oz), minus tax we would have paid on the equivalent income (-30%) and multiply it by .7 (as we will assume John has a freehold home resulting in lower living expenses) and we get around .6125oz per week required x 52 (31.85oz Gold per annum) x 15 years of retirement = 477.75oz Gold required to fund John's retirement. Your figures may vary depending on inputs.

I wouldn’t advocate relying on a single asset class to fund retirement. Personally I will be looking to build a portfolio of income producing assets (which also rise in value), but it’s an interesting exercise nonetheless.

Of course there are any number of risks that could void tax free retirement working in this way such as Gold confiscation, a windfall tax being applied to Gold, changes to the tax free threshold, changes to the 50% CGT discount. Or perhaps Gold doesn't retain a similar value against Australian wages/goods/services as it has over the last 100 years. Anything is possible and the turbulent times we have ahead are likely to result in significant changes to the way we live today...

This above post was inspired by the following from projack on Silver Stackers:

If you buy gold for retirement you do not have to worry much about CGT as an average person. Selling $40,000 value gold a year for your lifestyle for example even if the original purchase price was only $10,000 means $30,000 "profit" and only half of that amount is counted as CGT and used as assessable income, and that is 15,000. With the new $18,200 tax fee limit from the 2012/2013 financial year (and will go up further) this is no problem and you do not have to pay any CGT.

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