The continued destruction of fiat currencies calls for a new standard to measure savings, investments and purchasing power. Precious metals emerge as the winner and a person or country refusing to use fiat currencies as money in favour of gold and silver would be able to buy things cheaper today than in 2002. A gold-based economy would, in effect, see no inflation.
Governments and central banks across the globe, from China to India to Europe to America, have been debasing the fiat currencies they created, thus giving a false sense of wealth creation. Citizens have trusted government authorities and accepted fiat currencies in exchange for goods and services delivered. The authorities have then turned around and stealthily eroded the value of the paper currencies by printing money.
Hence, it's imperative for people not to measure their wealth in fiat currencies alone, but in real money --gold and silver-- trusted by civilisations for over 4,000 years. For instance, if a person bought a loaf of bread for Rs 10 and the Reserve Bank of India doubled the rupees in circulation, the price of it will double, or, stated differently, the value of the rupee will fall 50 per cent. Now, if you hold a loaf of bread instead of cash, you'll feel richer. But that's just an illusion. First, if you sell it for cash you will get Rs 20, but you will have to spend the same amount of fiat currency to buy when you need it. Second, the value of the cash in your account would have lost value.
The key advantage of gold and silver as money is that these can't be printed like paper currencies. Hence, it's very difficult to erode their value. In case of fiat currencies, the government waves a wand and the printing press begins operations.
Astute investors measure the worth of their portfolios in gold and silver, along with fiat currencies. Also, had investors put all their assets in gold and silver in 2002, when the US equity markets were bottoming, they would have been wealthier than sticking with assets priced in fiat currencies. As the table below shows, gold priced in rupees rose a whopping 521 per cent since January 2002 and silver in dollars by 620 per cent. Sensex, on the other hand, rose by 385 per cent. Hence, had one held on to gold and silver instead of the Sensex, the investor could have bought more of the Sensex today with the precious metals.
Measuring the value of one's portfolio in rupees would have given a false sense of wealth appreciation. But a look at gold and silver, which is real money trusted by people for over 4,000 years, shows a different picture. Though there is no data measuring the Sensex in gold, we'd probably have a poor return if we did. For instance, the Dow Jones Index grew a meagre 11 per cent since 2002 in dollar terms, but measured in gold, it posted a negative return of as much as 84 per cent.
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If a person had savings in bank deposits, the situation would look pretty grim. Not only has the rupee lost its value against gold by 521 per cent, it has also depreciated enormously against other major currencies. Notice that gold and silver have outperformed all markets, including the fast growing Chinese and Brazilian indices.
| PERFORMANCE OF ASSET CLASSES SINCE JANUARY 2002 | |||
| (In per cent) | Increase/ -Decrease | (In per cent) | Increase / -Decrease |
| Gold in dollars | +552 | SENSEX | +385 |
| Gold in rupees | +521 | Rupee dollar | +2.14 |
| Dollar index | -35 | Rupee euro | -35 |
| Dow Jones in dollars | +11 | Rupee yen | -98 |
| Dow Jones in gold | -84^ | Rupee pound | -8 |
| Silver in dollars | +690 | Rupee Swiss Franc | -47 |
| Silver in gold | +50 | Rupee Australian dollar | -49 |
| Texas crude in dollars | 325 | China Shanghai Comp | +27 |
| Texas crude in gold | -28 | FTSE China 25 index | +110* |
| Copper in gold | -2^ | MSCI Brazil index fund | +417 |
| Copper in dollars | +475 | Apple stock | +3,000 |
| * Since 2005; ^ Approximate Sources: Tradestation, Yahoo Finance, Goldprice.org, pricedingold.com | |||
Now, if a person used gold as money instead of fiat currency, he or she would face no inflation. In fact, goods would be cheaper today than in 2000. The table shows how prices of oil and copper have fallen when priced in gold. In fact, most commodities--cotton, coffee, natural gas, platinum, uranium, wheat-- are cheaper today when priced in gold instead of fiat currencies. That should be the case, as the supply of these has only increased relative to gold. On the other hand, the supply of gold has fallen relative to the supply of fiat currency and other commodities.
Silver is more expensive than gold if one uses 2002 as the base. However, over several decades, gold has outperformed it.
Hence, it is not only important to invest in the oldest monies of the human civilisation, but also it is imperative to measure your investment portfolio against precious metals. It will be informative to price all the daily purchases in gold or silver, to see how much of your wealth is being eroded by the governments and the central banks.
Let us end on a positive note. As the authorities were busy eroding the wealth of the individuals, a genius in America created a company called Apple and developed a string of products that wowed the world. Apple stock in dollars since 2002 has outpaced the rally in gold and silver. So, apart from measuring the investments in gold and silver, it is also important to pick assets that increase in real value more than the precious metals. Such a strategy would turbo-charge wealth accumulation.
The author is based in Chicago and is the editor of www.capturetrends.com