Measure & Money

A Paper by Louis Boulanger and Professor Fekete

Reward for Not Investing

Not Investing Can Increase Your Purchasing Power

What this means is that, during these turbulent financial and monetary times, deciding to defer investing part or all of your money and opting instead to save it for the time being by simply exchanging it for gold or silver bullion (which are monetary metals or another form of money yet to be fully recognised again as such), can be quite rewarding. This is the case, in our opinion, because our current global monetary system is failing and our fiat currencies are losing their purchasing power.  In other words, it is no longer necessary to invest to increase one’s purchasing power.

The two monetary metals are priced in US dollars, but investors in any country can purchase bullion by converting their currency.  The price in USD of gold has now increased on average by 11.2% per annum or a total of 343% over fourteen years.  The silver has done much the same during the same period, rising 264% or 9.7% per annum.  How do these gross (before any tax and fees) rates of return compare with your investments?  If your base currency is not the USD, then the following document will be of particular interest to you.  It shows what those gross rates of return were across ten major currencies and for each of the past fourteen calendar years, as well as cumulatively.

The document presents two tables, one for gold and one for silver, showing the reward for hoarding the metals in ten major currencies, based on their price change in those currencies.  For example, you’ll see that for 12 consecutive calendar years, the price of gold in USD (and broadly across all ten currencies) increased; but it dropped significantly in 2013.  In 2014, the price in USD stayed much the same (rising only 0.1%).  Still, after 14 years the gold price is up on average across all currencies by 9.7% per annum or 276%.  This price appreciation represents an increase in purchasing power, before tax and fees, by simply hoarding gold.

For an investment to have outperformed gold hoarding its performance measured in currency units must be greater, before tax and fees.  This means, for example, that investments must have earned more than 11.2% p.a. during the past 14 years to have been more rewarding for US investors than simply hoarding gold.  On the other hand, some currencies have been much stronger over this period than the USD: for example, the NZD.  At the beginning of 2001, it took more than two (i.e. $2.25) NZ dollars to buy one USD; at the end of 2014, it took one dollar less (i.e. $1.28)!

As a result, hoarding gold (or silver) has not been as rewarding for New Zealanders as it has been for Americans or indeed anyone else based in the countries of the eight other currencies considered.  But what if the NZD was to fall back to its average exchange rate with the USD since it floated in March 1985 of $1.66 for one USD (i.e. USD0.60/NZD)?  Then the gold price in NZD would rise 30% and the cumulative increase in purchasing power for the NZ hoarder of gold would rise from 6.7% per annum or 148% (as indicated in the table) to 8.7% per annum or 222% cumulatively.