Ever heard of the Gold Mac index?
05.06.2019 - News
created by Arnulf Hinkel, financial journalist
You might know the Big Mac index, created by British "The Economist" correspondent Pamela Woodall in 1987 while looking for a comparison of currencies on the basis of purchasing power parities (PPPs) in different countries that was both catchy and easy to understand, even for people unfamiliar with basic economic principles. Woodall thus based her comparison on the price of a McDonald's Big Mac in different countries, converted into US dollars.
Index calculation based on the law of price uniformity
In order to examine the PPPs of different countries and identify a possible over- or undervaluation of a single currency, economics require a so-called "perfect market", in which there are no discernible price differences for comparable, "homogeneous" goods – regardless of where these goods are purchased. In real life, of course, this might not be the case, but the Big Mac proved to be sufficiently standardised and thus suitable to give the Big Mac index practical meaning. By now, the index has been calculated for over 30 years.
Gold Mac index compares purchasing power of gold and euro
Directly based on the Big Mac index, the Gold Mac index has been calculated annually from 2002 to the present. Introduced by editors of the German information and comparison portal "Gold.de", the index focuses solely on the PPP of gold and the euro in relation to the Big Mac. Over time, the purchasing power of gold has fared significantly better than that of the euro: In April 2002, 4.11 Big Macs could be purchased with one gram of gold (then worth €10.98); by January 2019, at 8.95 Big Macs, the purchasing power of gold had more than doubled. In the same period, the purchasing power of the euro "dropped" from 4.11 to 2.70 Big Macs. However, the creators of the Gold Mac index point out that their index – created merely as a graphic intellectual game – completely ignores various scientific uncertainties, and that naturally the annual calculation has only a very limited informative value when it comes to gold, which is frequently exposed to a certain price volatility.