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Gold and Peacemakers: An Example of Inflation, Productivity and Technology



November 08, 2009 – Comments (0)

On 5 Nov, Marketwatch ran “The gun that beat inflation” by John Ittner.  Mr. Ittner’s research showed that the price of a new Colt Single Action Army (SAA) revolver, also know as the Peacemaker, has been roughly comparable to one ounce of gold from the time the revolver was first produced in 1873 to present day.  He also notes that an original 1873 Colt is worth considerably more than an ounce of gold, hardly a surprise.

I suspect there aren’t many products first manufactured in 1873 still in production today.  The Colt SAA has had some modifications over the years, but a new one purchased today is very close to its 135+ year-old predecessor.  Mr. Ittner states, “In 1873 the Colt SAA sold for $17.50. The complete kit with a holster and some ammunition could be covered by a $20 gold piece.”  He puts the cost of a new Colt SAA at $1500 from the custom shop.  Davidson’s Gallery of Guns lists 18 variations, most with an MSRP of $1290.  A dealer near me discounts the gun to $1180, a little more than an ounce of gold.

One thing this little example misses is the impact of technology and productivity advances on inflation.  In the article, the author credits Bob Tabor, a NY Post reporter, with the quote, "A damned good handgun is worth an ounce of gold. That's always been true."  In 1873, the Colt was state of the art.  Today, the Colt still costs about an ounce of gold, but states of the art are polymer framed, semi-automatics from Glock, Springfield Armory, Smith and Wesson and others.  Gallery of Guns lists 89 models of Glock pistols, most with MSRPs of $600 - $650.  A dealer near me discounts at least one model to $483, less than half the “good handgun = an ounce of gold” metric mentioned in the article.

It’s only one data point, but this does support the common assumption that gold offers good protection against inflation.  A new Colt SAA costs roughly the same when measured in gold as it did 135 years ago.  However, inflation metrics are not particularly good at picking up product price changes driven by technology advancements or productivity improvements.  On an inflation adjusted basis as measured by gold, a police department of today can outfit its officers with side arms for less than half the price of 135 years ago.  If Glocks are still in production 100 years from now, maybe someone will check to see how much scatter is in the Gold-to-Glock ratio.

One remote possibility is the “good gun = an ounce of gold” metric IS still valid, but Glocks are significantly undervalued or gold is significantly overvalued.  There isn’t much of a basis to support the trade, but it might be fun to tell friends your commodity trade is short gold and long Glocks.

No investable intelligence here, I just though the article presented an interesting example of how gold tracked inflation over a long period of time and wanted to share it.

Fool On!



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