How does gold help as long term savings?

When the time duration for savings is decided as long term, assets such as gold, real estate, property, etc., are preferred. The value of money is protected in these forms, and there is no need to worry about the ‘missing’ numbers. The assets are there, tangible in physical form.

As we get occupied with our daily life, unknowingly, their value would start to appreciate beyond the inflation rate. When that happens, they become inflation-proof assets.

Perhaps a property rented out (at a fair rental rate) can be a good idea if we are blessed with a bigger budget. Along the way, the rental becomes a form of passive income. But how about those with smaller budgets, Naresh? Fret not, dear friends. In this case, we can save in the form of gold. Gold is an affordable asset where almost every working-class people can buy it. The value held in this form is much more reliable than saving in the bank.

Number versus purchasing power

Some may still think that banks give out dividends, and hence it is OK to save in the bank. Even if that is the case, the increment we receive does not justify the inflation rate (unfortunately!). The situation would turn from bad to worse when considering the Malaysian Ringgit depreciation (as seen in 2015).

To do a quick recap, despite earning dividends of five to eight per cent in 2015, the Ringgit depreciated by 30%, contributing to the price of goods rising at least by 10%. By this logic, earning through dividends does not protect us against inflation.

With that said, to stay protected in the long run, owning physical assets, as stated before, such as gold, is a better alternative simply due to value being protected while retaining their purchasing power.

The purchasing power of gold

We saw how over 1400 years ago, it was recorded that one dinar of gold (4.25 grams) was sufficient to buy a goat. Even today, the same convertibility stays true. Though the price has gone up over the years, the purchasing power remained the same.

This is entirely not true with fiat money. We do not have to wait 1400 years to experience this.

In the context of Singapore, a plate of chicken rice used to cost SGD1 in the early 1990s. If we were to go to school, SGD1 would be sufficient to remain satiated. At today’s rate of about SGD4 per plate, the increase in number was not an indication of us getting richer by any means. Instead, the rise in the number indicated that purchasing has dropped by 75% across 30 years. Do you get the idea? On a side note, based on the inflation rate of 2.9%, it is estimated that the same plate of chicken would be worth SGD 10.60 in 2050. The question now is, what are we going to do about it?

Gold savings to fund pilgrimage trips

Let’s take a look at another example, and this time, we shall explore the impact of gold when we save for pilgrimage funds. The following table summarizes the purchasing power in the denomination of gold in the context of the pilgrimage fund (extracted from Tuan Zulkifli’s blog).

Year	Cost to perform Hajj (RM)	Respective gold price (RM/g)	Cost to perform Hajj (grams of gold)
1998	8,000	30	267
1999	8,131	35	232
2000	8,585	38	225
2002	9,445	42	224
2011	9,980	147	68
2017	9,980	180	56

We can observe from the table that the cost required to perform Hajj in the denomination of gold has been steadily decreasing from 267 grams of gold in 1998 to 56 grams of gold in 2017.  This represents an 80% reduction over 20 years. Hence, having our long-term savings, such as children’s education fund, pilgrimage fund, retirement fund, etc., in the form of gold is a better alternative, at least compared to keeping as cash in the banks. Apart from retaining the purchasing power, the total cost of a particular activity might be reduced too.

Children’s education fund

The parents who wish to save for their children’s education could consider saving 1 gram per month for each child. When they turn 18, the amount saved can be beneficial to fund their tertiary education.

For example, the total cost for a Bachelor of Arts (3.5-year degree) in a local university in Malaysia would be approximately RM 51,330 (https://educationmalaysia.gov.my/fees-and-costs/). 

This amount is equivalent to 195g of gold (based on the rate of Dec 2021). Using this as a target would take us about 16.5 years (1g X 12 X 16) to accumulate the said amount of gold.

Therefore, if we stay consistent in saving 1g per month since our children are still young, we would hit the intended target when they are ready for tertiary education. Then, the availability of education loans is uncertain, and even if it is available, we can be sure that the interest rate would be a significant concern to us. However, when the fund is prepared in gold, the other uncertainties such as political or economic instabilities (that are not within our control) would not affect us simply because the gold value is not affected.

Though the education cost in the future might increase, we can be reasonably sure that the same trend will be reflected in the gold price. When performed this way, depending on education loans is no longer needed.

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Your buddy on gold investing,

Naresh G