Today's astonishing risk: thoughts on the meaning of the phrase, "real dollar purchasing power.".

• Author: Caldwell, Roland G.

For as long as I can remember during my half century of managing people's money and estates, it has always been a challenge to try to describe in words the meaning of "dollar purchasing power." More by accident than intention, I recently came up with a way to visualize what I have been unsuccessful in describing. The chart shown displays the real price of gold since 1972, adjusted for inflation using the consumer price index. The chart is then inverted in order to display the opposite side of the gold-dollar equation, that is, the price of the dollar in terms of gold in the identical periods of time.

Trying to explain real dollar purchasing power is almost metaphysical. There is no certain benchmark to determine whether any paper currency, such as the dollar, has increased or declined in relative terms that are universally acceptable in some measurable and useful way. Far too many variables influence currency exchange rate changes to ever pinpoint which way a currency is moving relative to all other currencies. Thus the necessity, for anyone seeking to understand what is changing, is for dollar purchasing power to be quantitatively determined in reference to some constant or in relationship to some other form of tangible commodity that possesses characteristics that are also widely accepted as to that commodity's tangible intrinsic value.

Gold, long abandoned as a practical medium of exchange, is still regarded by many investors as an ultimate store of value, particularly in Middle Eastern and in older sovereign societies. Its known qualities--malleability, corrosion resistance, durability, and beauty--have made it valuable throughout history. In recent years, many have begun to refer to oil as "black gold," and it is now being hoarded by some as a substitute for gold. Oil remains, however, a commodity that is actively pumped, refined, and sold for practical and vital usage everywhere. Its qualifications as a store of value are affected because it is liquid, has bulk storage problems, and because it has only a relatively short shelf life. This gives oil a supply and demand aspect that makes it less than an ideal substitute for gold, which unlike oil has a fairly limited commercial supply demand component to impact its price.

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Gold remains the best proxy, or reliable benchmark, against which a paper or fiat currency's value or purchasing power change can be measured. The volatility of the purchasing power changes shown in...