What if gold is the only true global currency?

Gold price has by now almost reached $1,000/oz, while dollar continues to fall against foreign currencies. So it’s natural to wonder if gold has become the only reliable measurement of wealth. If we believe that, as I do, then it says something very interesting about two types of US assets: houses and franchise businesses.

As quoted from one Financial Times article on March 7, 2008, “in gold terms, US houses” was the most expensive at the beginning of 1970s when the median house cost more than 700oz gold. And they nearly regained the peak in 2001. Their decline since then, however, now put a median US house at only 220oz of gold.

In gold terms, US housing has lost more than two-thirds of its value since 2001. By the same token, the US financial industry has lost more than half of its value.

Either the gold price has been inflated by speculation to already unsustainable level, or the US has permanently lost its competitiveness and hence a deserved collapse of its wealth. I don’t believe either. That leaves only one possibility: in 12-18 months when we look back, it’s highly possible that franchise value of major US businesses, from multinational companies to well positioned small technology companies, as well as value of US houses, are being tremendously undervalued.

This conclusion is not an answer at all – it’s a starting point for any value investor to explore what kind of business is truly franchise, which can demonstrate pricing power and earnings resilence in a stagflationary environment, and what kind of business, however cyclical it might appear to be, has strong balance sheet, strong free cashflow even in a depressed environment, and significant hard assets to protect itself. The next 3-6 months will be value investors’ “candy shop” and buying good quality business at absolutely cheap price will become likely again – the last time it occured was after 9/11.


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