Gold Still Pays the Rent

Posted | 26/04/2016 / Views | 3163
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Every once in a while a story is released that reinforces not only the long history that gold has played as a monetary asset but additionally supports the idea that this history is not just a thing of the past. Today we present such a story from a court in Ohio where Federal judge George Smith has ruled in support of an issue relating to what is known as a “gold-clause” in a commercial property lease over the Commerce Building in downtown Columbus which dates back almost a century.

The gold-clause was a common inclusion in property lease documentation at the start of the 20th century and allowed owners to link rental rates to the price of gold at lease renewal in an attempt to combat inflation’s destructive impact on income in a similar manner to CPI indexing today. An ambiguity arose after gold-clause usage was prohibited in accordance with the ban on private gold ownership from the mid-1930s to the mid-1970s. In 1977, gold clause usage was again established as legal and drew debate over contracts that had been entered into prior to the prohibition.

In a stark reminder of fiat currency’s inept wealth preservation properties, the consequence of this ruling could see yearly rent for the commercial building in question jump from $6,000 to over $300,000 in accordance with the fact that gold at the time the 1919 contract was signed was just under $21 per ounce. With gold as the yard-stick, it is easy to see the destructive force of inflation over a relatively short period of time.

In recent decades there have been similar rulings within the U.S. in favour of upholding gold-clause components of property lease agreements. These include a 1990 appeals court case in Washington State, a 1999 case in Indiana where a company was ordered to pay around 8,000 ounces of gold in back-rent for land occupied by its commercial building and a 2008 case where an Ohio appeals court upheld a 1912 contract clause covering a building that was being rented for $35,000 at the time. In the latter case, upholding the gold indexing clause had the potential impact of applying an effective rent of $1.5M. History has seen that it does not always require a court to see such behaviour. In a broader observation, 2011 saw Donald Trump accept $200,000 worth of gold bullion in payment of a 10 year commercial lease deposit at 40 Wall Street in New York illustrating that gold still literally pays the rent.