Call it the great ratio game, with gold as the consistent player. We have the gold/S&P ratio, the gold/oil ratio, the gold/men’s suit ratio, and the gold/median-housing-price ratio.
In 2014, the game took on a new wrinkle – the price of gold linked to rentals, specifically commercial building rentals. The players in this game understood the value of gold well enough to battle it out in a court of law. Who would have imagined?
Back in 1919, Philip Lang wrote a ninety-nine-year lease for a Columbus, Ohio office building for six thousand dollars per year. Lang realized rental prices would eventually rise, so he made a point of devising a contract with a gold clause. In other words, as a landlord, he linked any future rental increase to the value of gold at the time of the increase, much as we might use the Consumer Price Index or the cost of living or a similar benchmark for price increases in other areas.
But in 1933, after President Roosevelt made it illegal to own gold, Congress made gold clauses unenforceable. However, once it became legal to own gold again, in 1971, and the value of gold was allowed to float freely, the ban on gold clauses was rescinded. In 1977, Congress ruled debts from gold clauses on or after 1971 were now enforceable.
Last month, almost a hundred years after he approved a ninety-nine-year lease for his downtown Cleveland office building based on the changing price of gold, Philip Lang was vindicated by a federal judge. His grandchildren prevailed in a lawsuit they had filed against the lessee, Commonwealth Investments.
Hamstrung by the original agreement, which was never updated after the congressional reinstatement of gold clauses, the family regularly collected just six thousand dollars a year in rent from Commonwealth, who, just as regularly, sublet the office space to forty tenants for nine hundred thousand dollars a year. The family’s complaint makes the inequity clear:
“In 1919, the value of gold was $20.67 per ounce; today, gold is valued at more than $1,200 per ounce…Commonwealth Investments, however, has continuously failed to comply with this obligation, and instead has paid only the face amount of rent – $6,000 per year – sometimes even refusing to pay that amount in a timely manner.”
The complaint also notes that if Commonwealth were in compliance with the gold clause, they would be paying $340,000 annually to rent the office building.
Courts have ruled in favor of gold clauses in 1990 and 1999. And in 2008 an appeals court ruling upheld a 1912 gold clause for another downtown Cleveland building. In that case, the defendant’s rent was increased thirty-five thousand dollars to about one and a half million dollars.
Gold’s come a long way, from just above twenty dollars in 1919 to the closing spot rate of twelve hundred thirty-nine dollars on April 25 of this year. Thus the attorney for the plaintiffs was absolutely right when he characterized Commonwealth Investment’s nine-hundred-thousand-dollar sub-lessee receipts as “a windfall” that came at the expense of the building’s actual owners.
But gold ultimately proved itself as an unmatched legacy from Philip Lang to his grandchildren. The judge ruled the new annual building rent of $348,300 would be in force from 2014, when the lawsuit was filed, to 2018, when a new ninety-nine-year lease goes into effect. The new lease will also have a gold clause, with the power of the courts validating it as a more legitimate benchmark of wealth than currency. Unlike the difference between the value of $6,000 cash a century ago and today, gold has value that stays constant.
Gold can also be security during your lifetime, and legacy to your heirs. While certainly real estate can still make sense as an investment; like gold, it’s a tangible asset that increases in value over time. But unlike gold, it’s neither liquid, nor portable. It also has a high buy-in, and tremendous costs associated with both buying and selling. And fortunately, with gold you don’t have to worry about picking the right renter.