How does gold serves as currency saviour?
There was an interesting phenomenon with the gold price in the year 2015. The gold price dropped from the highest level of USD 1,300.7/oz to USD 1,050.8/oz within a year. This marked a decline of 19%. Meaning those who bought gold at the peak and sold at the bottom would have experienced a loss! Nobody likes to lose money, am I right?
How about in Malaysia?
In Malaysia, however, that was not the case. In early 2015, gold price was at approximately RM140 per gram, even as low as RM135 per gram. By the end of 2015, the gold price had appreciated RM160 per gram. In other words, if we were to buy gold at the beginning of the year and sell them at the end of the year, we would probably still be 10 % profitable. This gain was better than other financial tools that yielded five to eight per cent.
Coming back to the scenario described above, why would such an inverse situation occur in the first place? The main reason is a decline in the strength of Ringgit by 30% in the same year. Political and economic turmoil caused the gold price appreciation, while the world’s gold price was declining. Therefore, gold has essentially protected our wealth from losing its value despite the chaos and uncertainties.
Gold is not for investment
From what we have discussed, we look at gold as a tool to protect our wealth against inflation. This inflationary effect occurs due to excessive money printing and the decline of our local currency. After the 1997 incident in Malaysia, Prime Minister Tun Dr Mahathir openly mentioned gold as the stable money than Ringgit. Consequently, the Central Bank of Malaysia (Bank Negara Malaysia) started producing their gold coin known as ‘Kijang Emas’ (translated to Golden Deer).
The very reason our local currency cannot store value gives rise to considering gold as a form of saving. This is echoed by financial experts such as Tuan Azizi Ali, Robert Kiyosaki, Peter Schiff, James Rickards, Michael Maloney, and many more. The primary function of gold is to store value, not as an investment tool that promises a high return. Hence, people by large are still confused when considering gold as savings. They are more familiar with recognizing gold as an investment.
Gold is alternative to savings
We have to understand that gold is an alternative to savings, simply since the fiat money we currently use was once upon a time backed by physical gold. As discussed previously, the convertibility of a one-dinar gold coin (4.25 grams) to a goat which took place approximately 1400 years ago, still stays true to this day. This shows how gold retains the purchasing power stored in the form of gold. Gold essentially protects our wealth, regardless of what happens over 1400 years, whether political, economic or any other state of chaos.
The importance of gold in finance
By nature, gold does not contribute to the increase of our wealth. Its primary function is to protect our wealth against political and economic uncertainties (as well as emotional ones, too).
From a holistic point of view, we need to save portions of money while there are portions of money that we need to invest. Though it may seem wise to invest all additional funds, we must consider that not all investments generate profit. Some investments might not work out as we intend.
Hence, the main reason we save gold is not to grow the money per se but to protect the value of the money. Based on this context, it is OK if the money does not grow, as long as the purchasing power is retained. Growing the money through investments is ideally performed using an additional pot of money. But before we go into that route, wouldn’t it be wiser to protect our savings first? This allocation is the one that we would rely on should we experience a financial ‘crunch.’
How much gold should we keep/save?
Based on what I have read from various sources, upon allocating our emergency fund, we can consider converting about 50% of this emergency fund into gold. Regardless of the volatility that the gold price experiences, the value would still be protected. Other financial tools may give a perception that the fund is growing, but when adjusted with inflation, its value would probably not be protected at all. For instance, SGD 100,000 today might not be as valuable in the next ten years, though the number remains relatively the same.
Based on this understanding, I would like to adopt the advice by Tuan Azizi Ali where he says 10% of our wealth is to be converted into gold at all times. Using the earlier example, SGD 100,000 would require SGD 10,000 in gold while the remaining to be invested in other financial tools we are familiar with. This remaining portion is the allocation we strive to grow through investments.
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Your buddy on gold investing,
Naresh G