The Mirage of Returns

01 — The Ruler Problem

Imagine you are asked to measure the growth of a tree. You return each year with your tape measure, and each time the tree appears to be the same height. Satisfied, you declare the tree has not grown. But what if the tape measure itself is stretching — a centimeter becoming two centimeters, silently, invisibly, overnight? Your readings would be technically accurate and profoundly misleading at the same time.

This is precisely the situation with fiat currencies. The US Dollar, the Euro, the Japanese Yen, the British Pound — all are elastic yardsticks. They are issued by central banks with a mandate to maintain "price stability," which in practice means targeting approximately 2% annual inflation. At 2% compounding over 50 years, a currency loses roughly 64% of its purchasing power. The ruler shrinks by nearly two-thirds. Yet we use this ruler to measure whether we are getting richer or poorer.

Returns denominated in a weakening currency are not lies, exactly. They are truths told in a language that quietly changes its own vocabulary.

02 — The Interest Rate Veil

When investors compare returns across currencies, they often reach for the theory of interest rate parity as an explanatory framework. The logic is elegant: if a German bond yields 3% and a US bond yields 5%, the market will price in a 2% depreciation of the dollar against the euro over that period, such that the real return, currency-adjusted, converges. In a frictionless world of perfect capital mobility and rational actors, this arbitrage closes all gaps.

The theory is partially correct, and almost entirely insufficient.

Interest rate differentials do explain short-term currency movements with some degree of reliability. A currency offering higher nominal yields tends to attract capital flows that appreciate it — the famous carry trade — until some shock reverses the flow violently. But over longer horizons, the link between nominal interest rates and currency returns becomes tangled with something deeper: divergences in the real rate of money creation and, consequently, in inflation.

The critical distinction is between nominal and real interest rates. A bond yielding 5% in a country experiencing 4% inflation delivers a real return of approximately 1%. The same bond in a country with 1% inflation delivers 4% in real terms. If you compare only the nominal yields — as most market participants habitually do — you are again measuring with a shrinking ruler, just a different one.

This is how entire generations of savers have been systematically impoverished while believing themselves to be prudently invested. Japanese investors who held Japanese government bonds through the "lost decades" earned their nominal coupon faithfully. They did not lose money in yen terms. But measured against anything real — a basket of goods, a barrel of oil, an ounce of gold — the purchasing power of their capital declined dramatically.

03 — What Inflation Actually Is

There is a useful distinction between two types of what we loosely call "inflation." The first is goods price inflation: the grocery store costs more, petrol is more expensive, rent climbs. This is what CPI captures, imperfectly, through a shifting basket of consumer goods chosen by statisticians.

The second is monetary inflation: the simple act of creating more units of currency. This precedes and causes goods price inflation, but with variable and unpredictable lags. When central banks expand their balance sheets — as they did dramatically after 2008 and again after 2020 — the new money does not instantaneously appear in consumer prices. It first inflates asset prices: equities, bonds, property, art. The person who owns these assets sees their wealth rise in nominal terms and concludes they are prospering. The person who holds cash or wages watches their purchasing power erode.

The great inflationary redistribution is played out slowly enough that most participants never recognise the mechanism.

Returns measured in nominal currency terms disguise the transfer of real wealth from creditors to debtors, from cash-holders to asset-owners, from the unconnected to those nearest the monetary spigot. The stock market goes up. The economy, measured in constant units, may not.

04 — Enter Gold: A Fixed Ruler in a World of Elastic Ones

Gold has a singular property that makes it useful for measurement: no central bank can create more of it. Annual mining production adds roughly 1.5–2% to the existing above-ground stock — a remarkably stable figure that has changed little over centuries (World Gold Council, 2024). This makes gold the closest thing available to a fixed unit of account, a ruler that does not shrink.

The decision to measure investments in gold rather than currency is not a statement about gold being a good investment. It is a choice about epistemology — about what kind of knowledge you are trying to gain. When you price equities in gold, you are asking: has this company created real value, or has it merely floated upward on a rising tide of monetary expansion?

The answer is often sobering. The Dow Jones Industrial Average, priced in US Dollars, has risen from roughly 900 in 1971 to over 40,000 today. Priced in gold, the picture is radically different. In August 1971, when Nixon closed the gold window and ended Bretton Woods, one troy ounce of gold bought approximately 25 Dow points. Today, with gold near $5,000 and the Dow near 42,000, one ounce buys approximately 8 Dow points. The stock market, in real gold terms, is worth roughly one-third what it was when the fiat era began.

This is not a fringe view. It is basic accounting, rendered invisible by our habitual choice of currency as the unit of account.

05 — The Post-Bretton Woods World as Natural Experiment

August 15, 1971 is, in retrospect, one of the most consequential dates in modern economic history. President Nixon's announcement that the United States would no longer convert dollars to gold at $35 per ounce ended the last formal link between any major currency and a fixed commodity standard. The world shifted, entirely and irreversibly, to a system of fiat currencies — money backed by nothing but the credibility of governments and central banks.

This shift created what is effectively a controlled experiment, running now for over fifty years, in the behaviour of an economy freed from monetary constraints. The results, measured in gold, are instructive.

Post-Bretton Woods record

• US monetary base — expanded by a factor of more than 100
• US consumer prices — risen by a factor of roughly 7
• US house prices — risen ~15× nominally; modestly in real terms
• Gold price — risen from $35 to over $5,000 — a factor of more than 140
• Long-term US Treasuries — delivered negative real yields for significant periods
• Top 1% wealth share — risen dramatically throughout the period

These are not coincidences. They are the predictable consequences of a system in which money can be created without limit, and in which asset prices — priced in that depreciating money — tend to rise even when the underlying real value may not.

06 — Reading the Gold Chart Clearly

When you look at asset prices denominated in gold over the post-Bretton Woods period, several things become sharply visible that currency-denominated charts obscure.

Commodities priced in gold have mostly fallen — significantly. Oil in 1971 cost roughly 0.06 ounces of gold per barrel. Today, at $80 per barrel and $5,000 gold, it costs 0.016 ounces — a 75% decline in real terms. The shale revolution, efficiency gains, and global supply expansion have genuinely made oil cheaper in real terms, even as its dollar price has risen. The currency-priced chart told you oil got more expensive. The gold-priced chart tells you it got much cheaper. Only one of these reflects the underlying physical reality.

Equities priced in gold have underperformed dramatically since 1971, with two significant exceptions: brief periods in the late 1990s technology boom and the 2010–2020 era of zero interest rates. For most of the post-Bretton Woods period, equities have merely kept pace with monetary expansion, not outpaced it.

Real estate priced in gold tells a particularly stark story. Property values in major cities appear to have exploded in dollar terms. In gold terms, they have risen modestly or, in many cases, remain below their 1980 peaks. The housing affordability crisis was not primarily about homes becoming scarcer — it was substantially about money becoming more abundant.

Government bonds priced in gold have been one of the worst-performing assets since 1971. The "risk-free" asset class has dramatically destroyed real purchasing power for anyone holding long-duration paper through the full period. The coupon payments arrived faithfully; the gold equivalent of the principal repaid was a fraction of what was lent.

07 — The Gram as Democratic Unit

The troy ounce is the professional's unit — unwieldy and unfamiliar to most people. The gram offers something more accessible. One gram of gold today costs approximately $160. Expressing prices in grams — or fractions of grams — brings the measurement within intuitive reach.

A median US annual salary of roughly $60,000 was worth about 240 grams of gold in 1971. Today, the same salary buys approximately 375 grams. This suggests real median wages have improved modestly in gold terms — a more optimistic reading than the purely fiat narrative, but far less impressive than the nominal dollar figures imply. The gains have been real but modest, not the multiplier that dollar-denominated GDP statistics suggest.

The gram-denominated perspective has another virtue: it makes visible what currency depreciation conceals. When a government bond pays 4% per year, the coupon appears generous in nominal terms. But if gold is rising 20% per year — as it has done in several recent years — the bondholder is losing purchasing power at 16% annually. The gram-denominated lens makes this obvious at a glance.

08 — Two Sources of Return

None of this means that currency-denominated investments are worthless or that gold is always the right answer. Gold has its own volatility, its own opportunity costs, and produces no income stream. The argument here is not prescriptive but analytical.

What measuring in gold provides is perspective — specifically, the ability to distinguish between two fundamentally different sources of investment return.

The first is real value creation: a company genuinely innovates, becomes more productive, captures more market share, generates more goods or services per unit of input. This creates real wealth, visible even when measured in hard units.

The second is monetary re-pricing: asset prices rise simply because the unit of account is depreciating, and all prices must eventually adjust. This creates nominal gains but no real wealth. It is the tide lifting all boats — but also lifting the waterline, so no boat is actually higher than before.

Most equity returns, especially since 2008, have been a blend of both. Separating them requires a stable measuring unit. Gold, for all its imperfections, provides one.

— The Map and the Territory

The great danger of measuring wealth in fiat currency is that we can mistake the map for the territory. A rising stock portfolio, denominated in dollars that are themselves falling, can feel like progress while representing stagnation or decline. Generations of pension savers have been comforted by nominal returns while suffering real losses. Governments have inflated away debts while creditors were distracted by the nominal value of their interest payments.

Measuring in gold does not provide perfect clarity. But it removes one layer of distortion — the elastic ruler — and replaces it with something closer to a fixed reference point. In a world where every measuring stick is owned and managed by the entities being measured, the value of an independent unit of account can hardly be overstated.

The ounce or gram of gold does not care about central bank mandates, electoral cycles, or fiscal pressures. It simply is what it is: a fixed quantity of a finite element, carrying fifty centuries of human consensus about its value as a store of wealth.

In a world of shrinking rulers, that is worth something.