Gold Breaches R18000/oz, Up 11% In Two Weeks!

The price of Gold breached R 18,000/oz for the first time ever on the 11th of January 2016. It is currently standing on R 18,239/oz.

Let’s take a look at the price of Gold in South African Rands (ZAR) over the last 30 years, and the returns a saver would have earned had they bought and held Gold over various time periods since then:

Date Price/oz Time Total Return Annualized Return
1 Jan 2016 R 16,406 2 weeks 11% 1408%
15 Jan 2015 R 14,592 1 year 25% 25%
15 Jan 2014 R 13,498 2 years 35% 16%
15 Jan 2011 R 9,353 5 years 95% 14%
15 Jan 2006 R 3,354 10 years 544% 20%
15 Jan 1996 R 1,478 20 years 1234% 14%
15 Jan 1986 R 707 30 years 2580% 12%

You will be hard pressed to find an equity fund in South Africa that outperformed Gold over the last 10 years.

Over the last 10 years Allan Gray’s Equity Fund only managed a 14.3% annualized return, while Coronation’s Equity Fund delivered an annualized return of 15.2%, according to their latest fund commentaries. Neither of these two examples take into account the rather spectacular fall we saw in the equity markets over the last two weeks.

Even though Gold performed so remarkably well, the financial services industry and mainstream media still has an overwhelmingly negative opinion about Gold.

If you are wondering why none of those extremely intelligent and well educated financial people are talking about these admittedly uncomfortable facts… well… I’m wondering too.

Gold up or ZAR down?

While it may not be immediately obvious to someone who is just starting to learn about currencies and the workings of our modern day financial system, to those who have even a basic understanding about these topics, it is clear that the figures above have more to do with the continued weakening of the South African Rand (ZAR) than they have to do with an increase in the purchasing power of Gold.

In fact, the purchasing power of an ounce of Gold (i.e. the amount of goods and services you can purchase with one ounce of Gold) has not changed all that much over the last 100 years, and, while more difficult to measure, it probably hasn’t changed all that much over the last 2000 years (at least not when compared to just about any other form of currency humans have used over the same period of time).

Since energy plays such a fundamental role in every industry in our modern world, one of best ways to measure changes in the purchasing power of a currency over the last century or so is to look at the cost of energy, as measured in that currency.

Have a look at the gold-to-oil ratio (the number of barrels of oil you can purchase with one ounce of Gold) over the last 70 years:

You will notice that the purchasing power of one ounce of Gold remains very consistent over time. The data series I have starts at 30 barrels/oz back in 1946, and ends with 37 barrels/oz today.

In other words, the purchasing power of Gold has remained remarkably constant for a remarkably long period of time.

Even though the purchasing power of Gold fluctuates up and down in the short term, over longer periods of time it remains pretty much the same.

The true nature of inflation

Now that we understand that one of the noteworthy properties of Gold is its ability to maintain its purchasing power over long periods of time, it should be clear that the figures shown in the table at the start of this article, that shows the “returns” earned by someone who saved his wealth in Gold, are actually not returns at all. Instead, they are just a reflection of how the South African Rand lost it’s purchasing power over time.

Gold didn’t really go up in value. It’s the Rand that lost value.

The phenomenon of a currency loosing purchasing power over time is commonly referred to as inflation.

Once you get into the nitty gritty details of the mechanisms through which fiat currencies are debased, you soon realize that a good way to describe the inflation experienced by holders of South African Rands is that it is in fact a hidden tax on the holders of the currency.

Another way to describe inflation is that it is a transfer of wealth from savers to borrowers, with the government being the biggest borrower of all, and thus, the biggest benefactor of this wealth transfer.

However, the best way to describe inflation is simply that it is just a clever form of theft. It is clever in that it is just complicated enough so that the average person doesn’t understand that they are being robbed.

Even the father of modern economic theory, John Maynard Keynes, acknowledged the true nature of the process:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
John Maynard Keynes

Gold as an inflation hedge

Throughout the ages, Gold has consistently been a safe haven preserver of wealth for people who had to live through times where inflation eroded the purchasing power of the fiat currencies they used for their day-to-day business.

If you stored your wealth in Gold while living through the hyperinflation of the German Mark in the Weimar Republic during the early 1920s, you would have been largely protected from having your wealth eroded away. The same is true for the many people who experienced very high or hyper-inflationary debasements of their fiat currencies more recently: the people of Argentina, Zimbabwe, Venezuela and the Ukraine know all too well what I’m talking about.

South Africans who chose to store their wealth in Gold were also protected from the inflation that plagued the South African Rand since, well… since its inception.

Over the last 10 years Gold did an even better job of protecting people against the loss of purchasing power of the Rand than did the vast majority of equity funds, retirement annuities and pension funds.

Owning Gold is one of the best forms of protection you can have against being a victim of inflation.

If you live in any country like South Africa, where there is a high possibility of continued weakening of the local currency, it certainly is a good idea to store a sizeable part of your wealth in Gold.



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