Wait - gold price shoots up, or the purchasing power fell?
As I begin to understand this concept, I am no longer concerned with the rise and fall of gold prices. Instead, I begin to see gold as the true form of wealth. Another way to put it is gold has better storage of value. The wealth we accumulate in paper money is virtual and subject to manipulation. At any point in time, paper money can be manipulated through monetary policy (or irresponsible governance). Meanwhile, gold cannot be controlled simply because we cannot print more gold. Therefore, it is the true form of money that God created for the use of human beings.
As much as we like to see the gold price rising, the flip side of this scenario is that our money is getting weaker in value. Weaker in value means the purchasing power is decreasing year after year. Just imagine, before 1971, we used to pay USD35 for one troy ounce of gold, and today the same amount of gold is worth more than USD1800.
This brings us to the question as to what exactly happened here. Did the gold price go up, or the purchasing power falls? The obvious one here is the gold price has indeed shot up, but the indirect truth is our money is losing its purchasing power.
For instance, if we were to look at the price of chicken rice in the 1990s, it would cost around RM3 per plate (I knew this because I used to eat this quite frequently). But today, the same plate of chicken rice is worth about RM7. Interestingly, the same item has to be purchased twice as much money.
The mystery of missing chicken rice
Now that we pay twice as much money for a plate of chicken rice, can we confidently say that the chicken rice stall owner has become more prosperous by two times?
The obvious answer is no, am I right?
If that is the case, the same is also true with gold.
Even though the gold price has appreciated, the truth is that gold savers' wealth remains the same. They are not getting richer by any means, but their wealth is protected in the long run. This is what it means by gold serving as storage of value.
To prove this point, let’s take a look at this real-life example. About 1400 years ago, during the times of Prophet Muhammad (PBUH), one gold dinar coin (4.25g, 999.9 fineness) was valuable to buy a goat. Even today, the value of one gold dinar is sufficient to buy a goat. Even though the gold price has appreciated these years, the value stayed the same. No more, no less. Is this a mere coincidence?
1 dinar coin by Public Gold. It is 24k gold weighing 4.25g.
We got deceived with the numbers (due to gold price shooting up!)
In other words, gold savers are not inherently getting any richer by simple means of gold price appreciation. Instead, their wealth is protected from inflation which by nature erodes the purchasing power of our wealth.
On the contrary, should we keep an amount of money in the bank (let’s say SGD 10,000, for example), do you think the value of SGD 10,000 stays the same over the years?
The short answer is no.
Please, do not get me wrong. The number may stay the same, but the purchasing power of that sum of money is essentially getting lower yearly. This is what inflation does to our hard-earned wealth. The SGD 10,000 saved by working day and night might be worth about SGD 8,200* over ten years (* taking 2% average inflation rate into account over ten years of duration). Due to this inflationary effect on our wealth, we are technically getting ‘poorer.’
From here, it is evident how the value of our money is decreasing year after year. The number might not change, but the inherent value has been lost by 20%. This is why we need to pay more money to obtain the same plate of chicken rice. In other words, we got deceived with the numbers.
Why there was paper money to begin with?
Another thing to note here is that the paper money we glorify is meant to complete transactions, i.e., buying and selling. Meaning they are not meant to protect our wealth in the long run simply because they cannot store value. Hence the best tool to serve as value storage in this history of humanity has always been gold (and silver).
If you find this article useful, consider sharing this with your friends and family. Let's create awareness about our money because nobody will come forward to help us.
Easy way to start gold savings can be found here: Gold Accumulation Program
Join my Facebook page for free here: FB page
Your gold savings buddy,
Naresh G