FMF - Friends of Minerals Forum, discussion and message board

[Paul S]

I have come across this a few times in forum posts where people compare the orignal price of a specimen, with the price it could be bought for today. I'm talking about the inflation part purely, not any appraisal value or the added value of a specimen because its species became more popular over time. I would like to add the inflation corrected value to my database (I'm using MS Access 2007), but inflation changes per country.

I already have the original price of the specimen in its original currency and a conversion to the currency I use today: the euro (using the conversion rate of the date of acquisition). Adding an inflation corrected price would be nice, but what would be the best way to calculate this? Should I link it to the average price of a bread then, to the price of an average bread today? The Big Mac Index would also suffice, I don't have many specimen that date from before MacDonalds ;-)

Are there more easier ways or is it just impossible to calculate? There would ofcourse be no need to calculate something that is not even a bit accurate!

[Carles Millan]

You should start by contacting your local government to get the official inflation rate that has been recorded during the last years in your area. I have that data referred to Catalonia from year 1961 to 2009, but it would be useless for you.

Then use a spreadsheet to calculate a factor for every year so you can multiply any price by that figure to obtain the adjusted for today's inflation cost in less than a minute.

Good luck!

[alfredo]

Governments lie. I expect the real inflation rate is higher.

[Jesse Fisher]

I'm not sure if it's outright lying in this case, but a matter of just what indicators they will choose to base their estimates of annual inflation on. If one were to include the cost of purchasing a house, I suspect that the calculated inflation rates over the past 10 years would be much higher than if one based solely it on other items such as the cost of fuel or food stuffs.

[Matt_Zukowski]

I know that US inflation rate data and calculations are hotly and openly debated, so I do not believe that the stated US inflation rate is a "lie," just an artifact of the agreed upon calculation method. There are many issues related to these calculations, most notably how they handle changes in assets prices like housing and changes in the quality of goods with time. To respond to Jesse - the prices of houses (an asset) are not included in inflation estimates. Instead they use what is called the rent-equivalent cost of housing (a consumption good) as their proxy for housing prices.

When economists talk about inflation, they first define a basket of goods that represents a weighted estimate of what the average consumer consumes. This basket does not include assets, so items like houses, securities, and mineral specimens can appreciate (or depreciate) independently of consumer inflation. This is not to say that there is no tie between asset prices and inflation: assets have typically been considered a good inflation hedge. So they are often or generally correlated, but there are times when that correlation breaks down. We have been (are) in such a time. Asset prices have fluctuated wildly over the last decade or so in the face of steady disinflation.

Bringing this back to minerals (whew), based on what i have heard and seen, there has been a rapid increase in mineral specimen prices over the last decade or so, much faster than consumer inflation. So to respond to Paul S, you may use consumer price inflation to "gross up" the value of your mineral specimens from their original purchase prices, but perhaps you should consider this a low or a conservative estimate.

Aside from changes in tastes in the collectibles market and other factors, I do believe that at least part of the rapid increase in mineral prices has been caused by the excess liquidity created by the world's central banks over this same period. The monitorists believe that this excess liquidity must go somewhere and I believe it has found its way into asset markets (rather than consumer goods markets).

I have no crystal ball and thus no ability to predict the future but I do agree with those much smarter than i am that the excess liquidity will begin to work its way into consumer markets, causing consumer inflation. If the connection between the CPI and the collectibles markets seen in the past holds, then mineral specimen prices will ride consumer inflation as people rediscover collectibles as an inflation hedge. But it is also possible that as central banks (inevitably) slow the presses, this deflationary force will keep asset prices (mineral specimens) in check. It will be interesting to watch this all play out.

[keldjarn]

Matt has some very good points related to how the official inflation rates must be considered with great caution. Sometimes the distinction between "lies" and "agreed upon calculation methods" is not easy to see. There are many such examples from the recent global financial turmoil illustrating how both the financial sector ( i.e. Goldmann Sachs) and governments (i.e. Greece) use "agreed upon calculation methods" to mislead rather than guide the public..
I believe the (political) decisions made by economists as to which elements to be included in the basket of goods forming the basis for calculating the inflation rate, may be a major reason for the recent disasters in the global financial sector. All countries have grossly overrated ordinary consumer goods in their "baskets" based on historical data which is no longer relevant. An increased flow of cheap consumer goods from China and other low-cost countries during the last decades have given the false impression that the inflation has been low (as illustrated by Carlos`list). Housing is an important part of the budget for every consumer, but the artificial "rent equivalent cost of housing" used by economists in every country does not reflect the real rise in prices of real estate and thus housing. This gross misinterpretation of a low inflation suits the politicians and the financial sector, but has lead to the central banks keeping interest rates too low and thus fuelling a dramatic inflation related to real estate, financial assets, art and collectibles. The rise in prices of high-end mineral specimens can be seen as a part of this development.
Thus I agree with Matt that when you consider mineral prices over time it is not relevant to compare only with the official inflation rate. It should probably be considered against the alternative use of surplus liquidity over time. That is why the prices of assets, collectibles, real estate etc., as pointed by Matt, may fluctuate much more than the price of ordinary consumer goods.

[Paul S]

Thank you all for the great input! I have found the inflation rates of The Netherlands from 1964 till now. They are calculated from common consumer products and services, so minerals are obviously not included. I contacted the Central Bureau for Statistics (goverment agency for the dutch statistics), but they do not have any data on the inflation of precious items/luxury goods. So there is no (Dutch) data available for collector's items like minerals.

I was thinking however that maybe there are statistics about the inflation of precious minerals, like diamonds or rubies, that are mostly used in the jewellery industry. They might be usable as reference material for other mineral inflations? I guess their prices are well known?

Maybe it would even be possible to calculate it ourselves if we can find some proper reference species and the prices over the years. For example pyrite, if we calculate the price per gram for specimen that are similar is shape and structure. If we get enough data from different years of acquisition, we could get some kind of inflation out of this. I'm afraid though that we will need a lot of data!

Maybe it would be possible to just make a guestimation of how much higher the mineral inflation would be compared to the standard inflation?

[Matt_Zukowski]

Robert Schiller (the one who wrote Irrational Exuberance) came upon the same problem with housing prices and eventually helped create the Case-Shiller index of housing values. In designing their index, they decided that what was needed is a repeat-sales method to calculate changes in price. This method looks only at changes in price for two or more sales of the SAME property. A statistical "average" of the change in all the repeat sales data in a particular place constitutes the index.

Individual mineral specimens are more unique than houses, and thus the use of a use of a repeat-sales method would be even more necessary for measuring mineral inflation.

[alfredo]

In the USA, do they include medical services, college tuition and other services? seems to me those things are a big part of many peoples' cost of living, and they've been increasing much faster than the official inflation rate.

[Matt_Zukowski]

Yes, the basket of goods includes all those items, and the weighting of each item in the basket is in proportion to the prorata share of spending on that item by the average consumer.

The people trying to assemble the index really are smart, diligent, and well-meaning in their attempt to put together the most representative index possible. One can argue with certain assumptions they settle on, but please know that this group of people spend their careers having these arguments and are really trying to seek the truth.

For instance, consider owner-equivalent rent. Changes in "shelter costs" are difficult to define in a society where many or most people live in owner-occupied housing. At the margin, the price of such housing is influenced (sometimes greatly) by investors who intend to rent the asset out rather than consume the housing provided by that asset. A large amount of research went into this issue, and the best estimate seemed to be trying to estimate the change in the cost of the service that housing provides. This service is the "avoided rent" that the homeowner gets by living in their home. There are problems with this method, seen especially at times like now when asset markets seem to move independently of goods markets. But over time, these problems are actually better than the problems they had back in the 70s when they tried to include the cost of the asset in the price level calculations.

[keldjarn]

In most countries inflation statistics is based on a consumer price index, but there are differences as to how these are calculated in different countries. In Europe the cost of owner-occupied housing is usually not included, even if home-ownership is the norm in some countries like Norway. But there are publications outlining what the effect would be if the price increases of housing were included also based on home-ownership. One such reference from Norway shows an inflation of about 0,5 % more per year from 1996 to 2007 if this element was included. A small figure in itself, but with a cumulative effect. A 0,5 % higher interest rate on loans during this periode could have limited the bubble that burst in 2009.
But still fine minerals probably have appreciated much more than this during the last 10 years.
Reference:
(Owner-Occupied Housing in the Norwegian HICP
In this paper, Statistics Norway analyses the impact of including Owner-Occupied Housing (OOH) in the Norwegian Harmonized Index of Consumer Prices (HICP) based on the net acquisition approach. Expenditure shares for OOH according to the net acquisition approach are estimated based on different sources. Different candidates for measuring the price development are also evaluated in relation to the Technical Manual on OOH for HICP. This analysis shows that the inclusion of OOH by using the existing House Price Index increases the Norwegian HICP, on average, by 0.5 percentage points per year in the period 1996 to 2007.)

[David Von Bargen]

Using diamond prices as a base collectible for inflation probably isn't a good idea since prices are controlled by a cartel. The easiest collectible pricing to find probably are stamps and coins. They really don't seem to have gone through "fad" phases like a lot of other collectibles. You could probably also see differences in the "high end" and more reasonably priced items.

[James Catmur]

Over the years I have tried to use the 'repeat sale' method, but not very systematically. When I come across a specimen that I know the previous sale price for and the date of the previous sale that gives me a data point. Doing this has suggested to me that about 6%/year was the average rate for many years until the mid 90s, then it went up! What I have never done is to compile a proper database of such values so as to build a year by year index, but I guess that one could do that if one had the time and inclination. The problem is that it gets very complicated as the two sales may not have been in the same currency, so then one has to decide how to convert (exchange rate or purchasing power parity).

Could be an interesting project I guess

James

[alfredo]

If the value of owner-occupied housing isn't considered, then probably the cost of land taxes isn't either. Over the last 9 years my property tax has jumped from $4,500 to almost $7,000 per year, one of the bigger chunks of my budget. OK, you economists are probably right, but on a personal level I always have the nagging suspicion that my expenses creep upwards far faster than the official rate of inflation.

Back to a more mineralogical note, last week I bought a little japanese stibnite crystal for $125, which probably came to the USA originally 90 to 100 years ago. The original price was still on it: $1.25... Wonder how that compares to the general inflation rate?

[Matt_Zukowski]

Yes, land taxes are considered as they affect rents. Alfredo, you may be atypical like me in that the basket I consume is quite a bit different than the average consumer.

A 4.7% inflation rate will take something from $1.25 to $125 over a hundred years.

A 5.25% inflation rate is required for the same change in 90 years.

[alfredo]

Thanks for the calculation, Matt! I don't know the official inflation averaged over the last 100 years, but I'd guess the mineral has appreciated slightly faster than the inflation rate?

[David Von Bargen]

An interesting calculator for various indices
https://www.measuringworth.com/uscompare/
(link normalized by FMF)

[Matt_Zukowski]

Using the interesting link posted by David and my trusty spreadsheet:

The CPI for the last 100 years rose 3.24% per annum, which would have increased $1.25 to $30.40.

The CPI for the last 90 years rose 2.8% per annum, which would have increased $1.25 to $15.50.

[GneissWare]

So the logical conclusion is that minerals are an excellent hedge against inflation. I intend to start making this argument to the spouse next time I buy something.

[Matt_Zukowski]

That's the argument I would make!

But seriously, it would be better to say that mineral specimens HAVE BEEN an excellent inflation hedge. The future is uncertain. Housing had been an excellent inflation hedge unless you bought after sometime around 2005. The stocks in many indices were an excellent inflation hedge from 1982 to 2000, but haven't kept up since. It seems likely to me that fine collectibles will be a good inflation hedge over long time periods assuming you can find a buyer. But the short run may be problematic because of the rapid appreciation over the last decade.