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Monday, July 25, 2011

Growing Wealth by Focusing on Purchasing Power

Those that wish to grow their wealth, may want to consider a slight change of perspective (if they have not already). We tend to think of wealth and the prices of everything in dollars. The price of items (houses, cars, bread, stocks, etc..) represents a supply and demand, and that dynamic is quantitatively described through price. The changes up and down in price and the rate at which they occur tell us something about changes in supply and demand of various good and services. This can be valuable information, but they information can be distorted because we measure price with a unit of measurement (the dollar) that keeps getting smaller.  I believe that we can get a less distorted view by using a measuring unit that does a better job of keeping value over time. One possible unit of measurement that keeps value over time better could be ounces of gold, but their could be other choices (silver, palladium, certain food products (bread), certain commodities, or maybe a combination of these items). The chart below shows the DOW priced in ounces of gold. What I see in this chart is that when the market bottomed in 1980 stocks were a real value and they created wealth (even measured against a stable unit of value). Since the market top in 2000 the market has been in a steady decline.

It is true that even gold prices do fluctuate, but over the long run it seems to be a better at maintaining it's value than the dollar.  The bottom line is the more stable your measuring stick of price over time, the less distorted the information that the given price and changes in price represent. I believe that the focus of wealth building should be increasing your purchasing power, not just the nominal amount of dollars. Ones purchasing power when looked at from the perspective of ounces of gold from the 2000 market top would have significantly decreased.





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