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 9.0% per annum or a total of 369% over eighteen years.  The silver price has done less well during the same period, but still rose 252% or 7.2% 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 eighteen 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 (by 28.1%) in 2013.  In 2014, the price in USD stayed much the same (rising only 0.1%).  In 2015, it dropped again; this time by 12.1%.  Then, in 2016 and in 2017, the gold price resumed its course of rising prices.  In 2018, the gold price fell by less than 1% in USD, but rose in 7 of the 10 currencies. After 18 years, the gold price is up on average across all currencies by 8.3% per annum or by 333% cumulatively.  This price appreciation represents a significant increase in purchasing power which can be acheived by simply hoarding the physical gold metal.

For an investment to have outperformed gold hoarding, its performance measured in currency units must be greater, before tax and fees.  For US based investors for example, an investment must have earned more than 9.0% p.a. during the past 18 years to have been more rewarding than simply hoarding gold.  On the other hand, some currencies have been much stronger over this period than the US dollar: for example, the NZ dollar.  At the beginning of 2001, it took more than two NZ dollars, i.e. NZ$2.25, to buy one USD; at the end of 2018, it took one-third less (i.e. NZ$1.49) to buy the same USD!

As a result, hoarding gold (or silver) has not yet been as rewarding for New Zealanders as it has been for Americans or indeed most anyone else based in the countries of the eight other currencies considered.  But what if the NZD/USD exchange rate was to fall back to US$0.50 (after all, it did fall from US$0.80 to US$0.50 in 2008 and another crisis could be just around the corner...)?  Then the gold price in NZ dollars would rise by 33%, even without any increase in the price of gold in USD, and the reward or cumulative increase in purchasing power for the NZ hoarder of gold would rise from 6.4% per annum or 206% (as indicated in the table) to 8.2% per annum or 311% cumulatively. 

In other words, although gold is indeed priced in USD and its price is normally expressed or quoted in USD only, the true value of hoarding gold is the increase in the purchasing power you get from it in your own currency. The question for investors to ask themselves is: how confident are you that your country’s central bank will preserve the purchasing power of your currency? In fact, since no central bank anywhere has ever succeeded at preserving the purchasing power of its fiat currency over time, the question then becomes: do you prefer to place your full faith in central bankers or do you also want to protect yourself from their prolonged and systemic debasement of fiat money? The choice is yours.