I wrote this public page for my friends who work in financial advisory or planning roles and wealth management. In speaking with them over the last few years, all of them have felt annoyed by trying to explain to clients that $1,000,000.00 does not carry the weight that it once did.

I hope this public research page makes your communication with these clients easier, especially since this isn't coming from you, but someone who does research for a living.

The Dollar Makes A Terrible Numeraire

People sometimes talk about $1,000,000.00 as if the value has stayed the same over the years. Let's compare $1 million from 2000 to today using a more accurate numeraire that has historically been used.

Gold.

At the beginning of 2000 (January), $1 million dollars purchased a little over 3,521 troy ounces of gold (gold's price was $284 per troy ounce).

At the beginning of 2023 (this year), $1 million dollars purchased almost 527 troy ounces of gold (gold's price is $1,898 per troy ounce).

This means that if we take the amount of gold you could purchase in 2000 (3,521 troy ounces) and evaluate that amount in dollars today, then you would have $6,682,858.00 in today's dollars!

This highlights one (of many) problems with people talking about the word "millionaire" in the context of US dollars. That is not the same today as it was in 2000. What I highlight above this answers why $1 million doesn't feel like much. $1 million is not much money; it's actually like having about $160,000 in 2000, which would have been a good amount of money, but nothing like $1 million in 2000.

If you go back in time to January 1971 when gold was priced at $35 per troy ounce (gold standard era), $1 million dollars purchased over 28,571 troy ounces of gold. That would equal a value of $54,227,758.00 in today's dollars.

Notice how the dollar makes a poor numeraire. In the United States, the dollar is legal tender, which is why it is used as the numeraire.

But for financial advisors, planners, and wealth management, this numeraire can cause headaches because a person born in 1990 may think that $1 million is a lot, but by the time that person turns 40 (2030), $1 million dollars is not much money.

Below I provide two reasons why gold tends to be a better numeraire over time. I will note to financial advisors, planners and wealth management talent that on a given year or two, gold may not be useful as a numeraire as short term fluctuations can happen. However, as we see with comparing $1 million in 2000 to $1 million in 2023 using gold as the numeraire, over longer periods of time, we may be able to answer the underlying why.

Note that gold as a numeraire is not the same thing as gold as an investment or speculative instrument. None of this is written from the view of investing, but from the view of what you measure by.

Gold As A Unit of Energy

I suggest that everyone who can visit a gold mine, do this a mental exercise to calculate the labor involved. What you see quickly involves energy. Human energy such as mental and physical work, extraction and transportation energy, in some cases, refining energy, etc.

What you see is how gold's price can often reflect energy costs plus the survivability of some gold businesses (mining, refining, jewelry, etc). Price and value do not always equal each other and this difference would involve a different discussion, but over time, I've seen the price of gold reflect the energy demands from gold.

In fact, in some cases (I'm thinking about what Frank Guistra said about Rob McEwen in the 1990s), it makes little sense for gold producers to produce gold at the low price. Rarely do we see this discipline with gold producers, but that highlights periods where the price and underlying costs are misaligned.

Gold As A Unit of Innovation

Human's desire for gold means that we crave new ways of getting gold faster and cheaper. We also crave finding new ways of making gold feel more abundant. The amount of gold that we've extracted today significantly exceeds the amount of gold humans had extracted by the end of the 1800s.

Gold's price frequently reflects periods of innovation (when we are not on a gold standard). During significant innovation we see gold's price - along with many other prices - falling. The inverse happens during periods of inflation and stagnation. This also explains why we see significant innovations during gold standard periods. Gold limits the money supply, but that actually forces us to find new ways to do the same thing.

Gold As A Unit of Risk

While this generally only applies to sovereigns, physical gold is immune to cyber-attacks, quantum computing, and other digital risks. Unlike agriculture, gold does not reproduce, thus it carries risk in that what you have, you have. But abundant agriculture requires significant physical security while gold's density allows small spaces to store significant values (and transport when needed).

Most people generally think of money in digital terms. This works provided that they are able to secure their digital resources. However, the digital world may someday be viewed as far less secure than we thought. This is one unstated reason why sovereigns may hold some gold.

Gold As A Retirement Unit

The following thought experiment involves a discussion with my friend Nathan who worked as a financial advisor for almost a decade and now works in wealth management for a few families. I added this discussion because Nathan is one of the few financial people who has studied gold as much as I have (both the chemistry and geology, not just financial side of gold).

In the below discussion, we hash out a few observations we've made over decades of observations in the context of living costs.

Me: Let me get your thoughts on some analysis for myself. I considered this when my parents were thinking about retirement and I'm curious what you think. If I'm aiming for a 20 year retirement, I came up with 2 troy ounces of gold per month of retirement would suffice to cover costs (20 years means 240 months, which is 480 troy ounces of gold). As we have discussed a number of times, I can't calculates a 20 year retirement in dollars because the dollar loses a lot of value over long periods of time. So planning for $200,000 per year in retirement as of now (2023) is a bad idea because in 20 years (2043), $200,000 might not carry the same purchasing value as it does now.

Nathan: I would share some of your concern on dollars. However, 2 troy ounces of gold per month might be good in a few areas of the country (United States) and quite a few places around the world, but not in many places. That's only a little over $910,000.00 for a 20 year retirement. Also while we both agree that gold holds its relative value over long periods of time better than dollars, gold can still have a period of bad years.

If you want to use gold as a retirement unit, then I think the better consideration to keep your options open would be 4 troy ounces of gold per month of retirement. For a 20 year retirement, that would be a little over $1,820,000.00. In the bad years for gold, you'd still feel a slight pinch, but you'd still have more places that you could possibly retire than 2 troy ounces of gold per month in retirement.

You'd also feel like a king in some areas around the world. We are talking about the United States, so it's a little absurd to say 4 troy ounces of gold per month in retirement when you consider some other countries that actually have better healthcare, education and food, but are cheaper.

Me: I see. Your big point is keeping options open with where I may be living?

Nathan: Yes. Most clients I've had who planned to retire often overlooked the where part of their equation. Let me share a few situations.

Some of my clients would know where they wanted to retire, but hadn't experience that where as a retiree. You can't vacation in a city and think you know how it will feel to be a retiree. In other cases, retirees planned to retire in a place based on what they heard from family or friends. But those family members and friends lived in the city as professionals. Living in a city as a professional differs than living in a city as a retiree.

I see a lot of prospective retirees plan to retire in a college town. Then when some of them do, they have to deal with doctors and medical staff that are new to the profession and they hate it. They also find a lot of housing services (plumbing, electricians, etc) are unprofessional. They realize later in their retirement that the college town has much higher costs in terms of value than they anticipated. In other words, cheaper isn't as important to them as good value.

Returning to your 2 troy ounce of gold per retired month estimate: that probably makes sense in many cities. But what value are you getting for those 2 troy ounces of gold? From what I've seen with retirees, cheaper places do not always have higher quality services in the United States.

Now Asia is different because Asian parents push their kids much harder, so you tend to have an abundance of high quality services. As you can see, there's so much nuance in these details.

Me: Zooming out then a bit, you're looking at the overall picture from optionality plus the good versus bad years. Like we both understand, gold holds its value over long periods of time, but gold does have periods where it doesn't perform well, such as the 1990s. Your advice seems to take into account that there's some psychology at play where I have to mentally be okay in those not-so-good years for gold.

Nathan: Exactly and retirees overlook that frequently. I've witnessed many clients and even friends who retired early because they didn't understand how they were experiencing good years. Then the times changed and suddenly they felt confronted with a costly reality. They were unprepared.

Gym memberships sometimes share the same financial situation here with their contracts. This happened a few decades ago with my friend and me. He signed up for a gym that offered a lifetime membership for a $3,000 one-time payment and an annual service fee of $25. My friend bragged that after a decade, he would be paying for less for a gym membership ($3,250) than most of us who paid $30 a month ($3,600).

What he didn't realize is that the $3,000 one-time payment worked because the gym made money by earning interest on that principle. When we experienced zero percent interest rates, the gym eventually had to update the contract. Some members got upset and sued. The gym went bankrupt and everyone lost their lifetime membership because the gym ceased to exist.

My friend never recovered his $3,000 plus his annual fees added over the period he was a member. He signed up for a deal during the good times of a business. He didn't factor in what would happen if the business struggled later. The gym was betting that interest rates would always be high because times were good.

Applying that to retirement: this is what most people do. They take a good period of time, then plan to retire based on environment of the good time. What happens when bad times come? They aren't prepared.

A little back-of-the-hand math that I like to consider, about 70% of people who retire during good times or good periods often end up back at work. I used to tell clients: only retire in a bad year, not a good year. You're more honest in a bad year. If you can't make retirement work in a bad year, then you have a high chance of ending back at work.

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Is $1 Million Rich?