How the purchasing power of gold has soared

You might be familiar with the Big Mac Index – a tool to make exchange rates more ‘digestible’. Developed by The Economist, it examines the price of a Big Mac in local currencies, working on the assumption that exchange rates should eventually move until the price of a burger is equal in any two countries. By the latest count, a Big Mac costs £4.49 in the UK, and $5.69 in the US, generating a ‘burger exchange rate’ of 0.79. At the time of going to press, this was almost bang on the official USD/GBP exchange rate.  

But exchange rates aren’t the only thing that burgers are useful for. They can also give us a neat insight into the purchasing power of gold, too. Since 2002, German website gold.de has calculated a ‘Gold Mac Index’, based on how many burgers you would hypothetically receive in exchange for a gramme of the precious metal.

What burgers tell us about the gold price

In 2002, a gramme of gold cost €10.98 – a sum that would have bought you four burgers. By 2023, the price of that gramme had risen to €56.55, which would buy you 11.64 Big Macs. Over the 20-year period, the value of a gramme of gold increased from four to 12 burgers; the value of €10.98, on the other hand, shrank from four to just 2.26 Big Macs. By this reckoning, the purchasing power of bullion has improved by a factor of 5.15 compared to the euro since 2002.  

Analysts at European asset manager Incrementum developed the idea even further with an iPhone/gold ratio. They calculated that gold investors had to pay 0.92 ounces of the precious metal for the first iPhone in 2007, but only 0.75 ounces for a top-of-the-range iPhone 14 pro by 2023. Gold has also increased its purchasing power against the iPhone, despite the technology’s cost (and capabilities) increasing substantially over the 15-year period.  

There is also an Oktoberfest index, and even a ski pass index. Incrementum analysts calculate that investors can get 27.6 ski day passes for an ounce of gold this winter season, up from 8.5 day tickets in 1998. Taken altogether, it’s tempting to conclude that gold has not only kept its purchasing power, but actually increased it over the past 30 years.

But, as the chart below shows, progress has been uneven. In 2004, your ounce of bullion would have bought you just 9.3 ski passes; and a gramme of gold would have paid for just 3.9 Big Macs. Gold’s performance as an inflation hedge is also less clear-cut than these indices might imply. 

The gold price soared by 150 per cent between 2005 and 2010 (a time of low and stable inflation). Yet between the start of 2021 and the middle of 2023, when we witnessed an alarming inflation surge, its price rose from $1,852 to $1,904 an ounce – an increase of under 3 per cent. 

But there is no denying that since the second half of 2023, it has been a different story. The gold price surged to a record high  in December, driven by a heady mix of central bank demand, geopolitical tensions and expectations of the first Fed rate cuts. It hit another record high at the start of this month, as the chart above shows. 

Does it have further to run? Analysts have struggled to pinpoint the drivers of the latest rally, and earlier this year analysts at JP Morgan warned that financial markets might have got ahead of themselves with rate cut hopes. They said that “gold still appears quite rich relative to underlying rates and foreign exchange fundamentals”, leaving the price vulnerable to a retreat in the first half of the year if a policy pivot doesn’t materialise as expected.

Yet US real yields should fall as rate cuts loom – generally good news for the bullion price. Geopolitical and economic uncertainty could also fuel safe-haven demand for gold, especially if tensions in the Middle East escalate, or the US economy slows later in the year. JP Morgan analysts forecast new highs in the second half of 2024, and an average price of $2,175 an ounce in the fourth quarter. Or, if you prefer, the price of a new iPhone could fall to just 0.7 ounces of gold by the end of the year.